Decisions of 2015

 

 

Amen, Chapter 7, Professional Fees and Costs

Case no. 12-61225

The Trustee filed the instant Application on March 4, 2015, seeking approval of a final award of total attorney fees in the amount of $149,280.00 and total costs in the amount of $9,330.31 to co-counsel the Goetz Law Firm and Waller & Womack. The fees and costs are being split per the terms of employment with $111,960.00 (30% contingency fee) to Goetz Law Firm and $37,320.00 (10% contingency fee) to Waller & Womack and costs in the amount of $7,686.31 to the Goetz Law Firm and amount costs in the amount of $1,644.00 to Waller & Womack, for services rendered and costs incurred from March 4, 2013 through March 2, 2015.

The Trustee states in the Application that following approval of the October 1, 2013, Settlement Agreement and Release with Lowe/Amen, LLC, Lowe Property Holdings, LLC and Lazy JC Ranch, LLC, he sold the 24 acre parcel of real property for $403,200. The Trustee, in the pending Application, seeks, in part, a contingency fee award in the amount $141,280 relating to the 24 acre parcel, explaining that "[t]he contingency fee is based on 40% of the new amount recovered after deducting the allowed Lazy JC secured claim ($403,200 - $50,000 = $353,200 x .40 = $141,280)." the Trustee’s efforts with respect to Mike Amen’s interest in Lowe/Amen, LLC resulted in a benefit to the estate of at least $87,040 and $281,168.66, or $368,208.66. The Court thus rejects Bar Nothing’s argument that "[t]here was no need for the Trustee to incur fees to collect the property of the estate[.]"

Turning to the matter at hand, the Trustee seeks, on behalf of the Goetz Law Firm and Waller & Womack, a fee of $141,280 for the liquidation of Mike Amen’s interest in Lowe/Amen, LLC. Such fee is based upon a gross sales price of $403,200. An application for fees filed on behalf of the auction company recites that the highest bid was $384,000, and that the buyer paid a 5% buyer’s premium of $19,200. The Court is not persuaded 2 that the Goetz Law Firm and Waller & Womack are entitled to a fee on the buyer’s premium of $19,200; they are entitled to a fee on the highest bid of $384,000, less Lazy JC Ranch, LLC’s $50,000 secured claim. Consequently, this Court concludes that the Goetz Law Firm and Waller & Womack are, based upon the Application as it was presented to the Court, entitled to a fee of $133,600 for the liquidation of Mike Amen’s interest in Lowe/Amen, LLC; a reduction of $7,680.00. Given the results achieved in this case, and with the one exception just discussed, the Court finds that the services provided by the Goetz Law Firm and Waller & Womack in representing the Estate were reasonable and necessary in resolving the various issues presented by this complex case. The Court further finds that the requested contingency award is within the approved contingency fee award contemplated in the employment application, and the costs in the amount of $9,330.31 are actual, reasonable and necessary.

In re Amen, June 2, 2015, Trent M. Gardner for the Trustee Joe Womack, James A Patten for Bar Nothing

2015 Mont. B.R. 272

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Amen, Chapter 7, United States District Court, Trustees Attorneys Fees

(affirming In re Amen, 2015 Mont. B.R. 272)

Case no. CV 15-56-BLG-SPW, Bankruptcy Case no. 12-61225

After selling a parcel of land owned by the bankruptcy estate, the Trustee filed an application for attorney fees. Bar Nothing objected, and the Bankruptcy Court held a hearing. After the hearing, the Bankruptcy Court approved the majority of the requested fees and awarded a total of $141,600: The Trustee's law firm received $35,400 and the Goetz Law Firm received $106,200. For the reasons stated below, this Court affirms the Bankruptcy Court's award of attorney fees to the Trustee and the Goetz Law Firm.

Whether the work constituted "trustee's work"

Bar Nothing argues that the Trustee did not make the necessary showing to be appointed as counsel for the bankruptcy estate. Instead, Bar Nothing claims that the Trustee merely performed typical trustee duties. If true, the Trustee would not be entitled to additional compensation for attorney services under 11 U.S.C. § 328.

A bankruptcy court may authorize a trustee to employ an attorney to assist with carrying out his duties. 11 U.S.C. § 327(a). The bankruptcy court can also "authorize the trustee to act as attorney...for the estate if such authorization is in the best interest of the estate." Under § 327(d), a bankruptcy court can compensate the trustee "only to the extent that the trustee performed services as attorney" and not for "the trustee's duties that are generally performed by a trustee without the assistance of an attorney or accountant for the estate." A trustee's expected duties include investigating the debtor's financial affairs, examining proofs of claims and objecting if necessary, being accountable for all property received, and making a final report and final account of the estate's administration to the bankruptcy court. 11 U.S.C. § 704. In contrast, a trustee must hire an attorney "when there is an adversary proceeding or a contested motion that requires the trustee to appear and prosecute or defend, when an attorney is needed for a court appearance, or when other services are needed that require a law license."

The Bankruptcy Court did not abuse its discretion by finding that the legal services were necessary. Even Bar Nothing's expert opined that these actions extended beyond normal trustee duties.

Whether the Trustee waived his right to attorney fees in the settlement agreement with Bar Nothing

Given the plain language of the Settlement Agreement and the context in which it was made, this Court agrees with the Bankruptcy Court. The Trustee did not waive his right to collect attorney fees from the bankruptcy estate. The Trustee only agreed not to seek attorney fees against Bar Nothing in relation to the adversary proceeding.

Bar Nothing Ranch v. Amen, October 27, 2015, James A. Patten and W. Scott Green for Bar Nothing Ranch, Trent M. Gardner, Jeffrey J. Tierney for Womack

2015 Mont. B.R. 489

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Amour, Montana Supreme Court, Consumer Protection Act, FDCPA, Prejudgment Interest

Case no. DA 14-0523

Shannon Amour sued Collection Professionals, Inc. (CPI) and Nancy Smith after CPI sought to collect Amour’s bill for Smith’s services as guardian ad litem (GAL) during Amour’s marriage dissolution proceedings. In March 2012, CPI filed a complaint in justice court to collect the debt. Amour filed a counterclaim exceeding the justice court’s jurisdictional limit and the case was dismissed. Amour then filed a complaint in the District Court alleging that CPI violated the Fair Debt Collection Practices Act (FDCPA) through attempting to collect a false debt; that Smith committed defamation by falsely publishing to third parties that Amour owed a debt; and that Smith violated the Montana Consumer Protection Act through her actions. CPI counterclaimed for the amount owed for Smith’s services under theories of breach of contract and breach of a court order.

The FDCPA defines "debt" as "[A]ny obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services, which are the subject of the transaction, are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment." Thus, "[w]hen determining whether an obligation is a ‘debt’ under the statute, courts focus on whether it arose from a consensual consumer transaction for goods or services."

CPI asserts, and the District Court concluded, that Amour’s debt to Smith did not arise out of a consensual transaction. Amour contests this conclusion, arguing that her debt to Smith arose out of the contract that Amour and Smith entered into in February 2008 specifying the amount that Amour would pay Smith for her services. Amour fails to recognize, however, that the February 2008 contract followed the dissolution court’s January 2008 order appointing Smith as GAL and directing that the marital estate would be responsible for paying Smith for her services. In its January 2012 order, the court then assigned half that debt to Amour personally. With or without the contract between Amour and Smith, Amour still would have been under court order for Smith’s services. Indeed, in response to a request for admission, Amour stated that her contract with Smith was "a document I was ordered to sign" by the dissolution court. Amour also stated in her complaint that the dissolution court ordered Smith appointed as GAL, and that Amour "did not want the services of Smith and did not request them." Under these circumstances, it is clear that Amour’s debt to Smith did not arise out of a consensual transaction and therefore that the FDCPA does not apply.

Amour also appeals the District Court’s award of interest on the principal amount. However, § 27-1-211, MCA, states:

Each person who is entitled to recover damages certain or capable of being
made certain by calculation and the right to recover that is vested in the
person upon a particular day is entitled also to recover interest on the
damages from that day except during the time that the debtor is prevented
by law or by the act of the creditor from the debt.

Section 27-1-211, MCA, has three requirements: (1) an underlying monetary obligation, (2) an amount of recovery that is certain or capable of being made certain by calculation, and (3) a right to recover that vests on a particular day. All three requirements are met in this case.

Amour v. Collection Professionals Incorporated and Smith, June 2, 2015, Terry A. Wallace for Amour, Matthew L. Erekson for CPI, Elizabeth W. Lund for Smith

2015 Mont. B.R. 286

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Bodeker, Chapter 7, Appeal, District Court, Fed. R. Civ. P. 60(b), (overruling In re Bodeker, 2014 Mont. B.R. 411)

Case no. CV-14-195-M-BMM, Bankruptcy case no. 12-60137

Bodeker signed his Schedules and Statements of Financial Affairs stating under penalty of perjury that they were true and correct. They were not. Bodeker sought advice from counsel as to the possible adverse consequences that could result from his fraudulent conduct. Counsel advised Bodeker he could face criminal charges. Counsel advised Bodeker that his homestead exemption could be subject to an equitable surcharge as Ninth Circuit decisional law permitted a bankruptcy court to equitably surcharge a debtor’s homestead exemption for payment of administrative expenses, when "reasonably necessary . . . to protect the integrity of the bankruptcy process. Bodeker entered into a stipulation and expressly waived both his homestead exemption and his right to a discharge as part of the settlement.

Bodeker moved under Fed. R. Civ. P. 60(b)(4), to have the bankruptcy court’s order approving the waiver set aside. Bodeker argued that the bankruptcy court’s failure to conduct a hearing on the proposed stipulation violated Fed. R. Bank. P. 9019(a). The United States Supreme Court issued its decision in Law v. Siegel, 134 S.Ct. 1188 (2014), before the bankruptcy court issued its ruling on Bodeker’s motions. The Court in Siegel overturned the Ninth Circuit’s equitable surcharge rule under Latman. The Court held that no equitable surcharge could be applied against a debtor’s homestead exemption for administrative expenses. A surcharge imposed for such purposes would contravene the prescriptions of 11 U.S.C. §522(k).

The bankruptcy court concluded that the order approving the waiver of homestead exception should be set aside, under Rule 60(b)(6), because Bodeker’s motion could also be construed as challenging the "continuing viability of the applying the law of the case doctrine." The bankruptcy court reasoned that relief from the order approving the waiver of homestead exemption was appropriate because the main reason Bodeker had agreed to waive his homestead exemption was to avoid the application of an equitable surcharge for Brandon’s fees and costs, and "[t]he threat of an equitable surcharge against [Bodeker’s] homestead exemption disappear[ed] after Law v. Siegel."

This case presents a single issue for review – Whether the bankruptcy court properly rescinded its order approving Bodeker’s waiver of homestead exemption based upon a subsequent change in decisional law?

Rule 60(b)(6) represents a catch-all provision. Relief under Rule 60(b)(6) requires a showing of "extraordinary circumstances." The requirement of extraordinary circumstances respects public policy favoring the finality of judgments and termination of litigation. A mere change in decisional law after entry of a final order rarely constitutes an exceptional circumstance that would justify relief under rule 60(b)(6). Similarly, a change in the law that occurs after a settlement agreement should not be considered an extraordinary circumstance that would warrant relief from the settlement under Rule 60(b)(6). 

The bankruptcy court abused its discretion when it afforded Bodeker relief from the parties’s stipulation based upon the United States Supreme Court’s subsequent decision in Siegel. Bodeker could have challenged the Ninth Circuit’s rule. Bodeker elected not to challenge. The bankruptcy court should not have relieved Bodeker of his informed, strategic choice, simply because he later determined his decision to have been improvident.

Brandon v. Bodeker, February 2, 2015, Robert K. Baldwin and Kyle W. Nelson for Appellant Brandon, Kevin E Vainio for Appellee Bodeker

2015 Mont. B.R. 57

 

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Boukatch, Chapter 13, Lien Avoidance, Ineligible for Discharge. (Kirscher. 9th Circuit BAP)

Debtors filed a chapter 13 bankruptcy case on February 8, 2011. The bankruptcy court converted the case to a chapter 7 case on November 21, 2012. The chapter 7 trustee abandoned the residence, given it was burdensome and of inconsequential value to the estate. Debtors received a chapter 7 discharge on March 25, 2013. Debtors filed their chapter 13 case less than four years after the filing of Debtors’ case in which they received their chapter 7 discharge. Debtors filed an amended chapter 13 plan on June 27, 2014, which provided the following regarding MidFirst’s junior lien:

LIEN STRIPPING:

SECOND LIEN: The claim of MidFirst Bank was discharged on 3/25/13 (dkt #89) in Debtors’ Chapter 7 case (2:11-bk- 03143 RJH) and this second place lien is totally unsecured. The property is encumbered by a first lien in favor of Wells Fargo in the amount of $228,300 and the fair market value of the property is $187,500. Debtors’ counsel shall file a separate motion to set aside the MidFirst Bank lien prior to confirmation of the plan pursuant to 11 U.S.C. § 506(a) and the lien of creditor,  MidFirst Bank shall be stripped from the property. No payments shall be made to MidFirst Bank.

Debtors conceded they were ineligible for a chapter 13 discharge under § 1328(f)(1).

The question before us is whether a chapter 20 debtor can avoid or "strip off" a wholly unsecured junior lien against the debtor’s principal residence in the absence of a discharge. The question before us is whether a chapter 20 debtor can avoid or "strip off" a wholly unsecured junior lien against the debtor’s principal residence in the absence of a discharge. The lien strip procedure in a chapter 13 case is a two-step process. Section 506(a),5 which is applied first, provides a valuation procedure and bifurcates creditors’ claims into "secured claims" and "unsecured claims." Whether a creditor who has a security interest in the debtor’s property is considered a "secured" creditor under the Bankruptcy Code depends upon the valuation of the property. a chapter 13 debtor may not modify the rights of "holders of secured claims" who only hold a security interest in real property that is the debtor’s principal residence. This subsection is commonly known as the "antimodification" provision. "However, the antimodification protection of [§] 1322(b)(2) only operates to benefit creditors who may be classified as secured creditors after operation of [§] 506(a)."

We join the "growing consensus of courts" that have followed the third approach and hold that nothing in the Code prevents chapter 20 debtors from stripping a wholly unsecured junior lien against the debtor’s principal residence, notwithstanding their lack of eligibility for a chapter 13 discharge. MidFirst holds only an "unsecured claim" for purposes of § 1322(b)(2); the claim is not subject to its antimodification protections. Because MidFirst’s claim is unsecured, we determine § 1325(a)(5) (protecting the holder of a secured claim until the debt is paid or the debtor is discharged) does not apply. This is because wholly unsecured liens are not "allowed secured claims" as the opening language to that section specifies. By seeking to strip off a wholly unsecured junior lien, Debtors seek to do just that: avoid the lien. They do not seek a discharge.

We conclude that § 1328(f)(1) does not prevent Debtors’ We conclude that § 1328(f)(1) does not prevent Debtors’ ability to strip off MidFirst’s wholly unsecured junior lien in their chapter 13 plan, because nothing in the Bankruptcy Code prevents chapter 20 debtors from stripping such liens off their principal residence under §§ 506(a)(1) and 1322(b)(2). We further conclude that plan completion is the appropriate end to Debtors’ chapter 20 case. Unlike a typical chapter 13 case, the lien avoidance will become permanent not upon a discharge, but rather upon completion of all payments as required under the plan.

Boukatch v. Midfirst Bank, July 9, 2015

2015 Mont.B.R. 357

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Bourke, Chapter 7, Sanctions, Automatic Stay

Case no. 15-60785

The Debtor’s filing of her bankruptcy petition gave rise to an automatic stay. The long-standing rule followed by this and other courts is that a violation of the stay is willful if (1) the creditor knew of the stay and (2) the creditor’s actions which violated the stay were intentional.

A party with knowledge of bankruptcy proceedings is charged with knowledge of the automatic stay. Further, "once a creditor or actor learns or is put on notice of a bankruptcy filing, any actions intentionally taken thereafter are ‘willful’ within the contemplation of § 362([k])." Debtor’s Motion was sent to Missoula Bone & Joint and included the suite number. Missoula Bone & Joint continued its collection efforts after it received notice of the filing of Debtor’s bankruptcy petition and even after the filing of Debtor’s Motion seeking sanctions against it for willful violations of the stay. Such actions by constitute willful violations of the stay with knowledge of Debtor’s bankruptcy.

Actual Damages.

Debtor offered evidence in the form of testimony showing actual damages caused by Missoula Bone & Joint’s willful violations of the stay in the amounts of: $34.50 to $46 in lost hourly wages; and $3.96 in mileage for Debtor to attend the hearing. Debtor’s evidence is uncontroverted; the Court finds that the Debtor is a credible witness. The Court finds that the total amount of lost wages and mileage caused by willful violations of the stay is $49.96.

Emotional Distress Damages.

Debtor asks for damages for emotional distress including stress and harm to her psychological well being, confusion, and causing her to be emotionally upset. Emotional distress damages are permitted under § 362(k) if the debtor "(1) suffer[s] significant harm, (2) clearly establish[es] a causal connection between that significant harm and the violation of the automatic stay (as distinct, for instance, from the anxiety and pressures inherent in the bankruptcy process). Lynsey already was under stress for an extended period of time because of her financial problems, injury, surgery and rehabilitation before she filed her bankruptcy petition. These stressors existed prepetition and cannot be the subject of an award of emotional damages for postpetition collection. Lynsey demonstrated that she is resilient, and disciplined. She endured the emotional stress without treatment, is employed and has received her discharge. After consideration of the record, the Court declines to award emotional distress damages under § 362(k).

Punitive Damages.

Missoula Bone & Joint sent the Debtor two invoices for prepetition debts after the date of the filing of Debtor’s bankruptcy petition and sent a third invoice after receiving Debtor’s Motion. In this Court’s view this is sufficient evidence of reckless or callous disregard for the bankruptcy stay and Lynsey’ rights to justify an award of punitive damages. The total punitive damages awarded by this Court is $900. The Debtor did not offer any evidence of Missoula Bone & Joint’s policies or employee training regarding bankruptcy and did not offer any evidence of Missoula Bone & Joint’s financial condition, which could prompt the Court to consider a larger award of punitive damages.

Attorney’s Fees.

In determining the appropriate amount of attorney’s fees to award courts look "to two factors: (1) What expenses or costs resulted from the violation; and (2) what portion of those costs was reasonable, as opposed to costs that could have been mitigated." Geranios tried but was unable to stop Missoula Bone & Joint from sending the Debtor postpetition collection demands for payment. Missoula Bone & Joint ignored the bankruptcy notice, ignored Debtor’s Motion for Sanctions and kept sending the Debtor invoices for prepetition debt.  Missoula Bone & Joint did not respond or offer to settle Debtor’s Motion, but simply has ignored all of these proceedings. Accordingly, the Court awards Lynsey attorney’s fees in the amount of $1,700.00 incurred in remedying Missoula Bone & Joint’s stay violations under § 362(k)

In re Bourke, December 24, 2015, Nik G Geranios for Bourke

2015 Mont. B.R. 634

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Brandon v. Bibliologic Ltd., Summary Judgment

Case no. 14-61370, Adversary no. 15-00024

Plaintiff initiated this adversary proceeding by filing a complaint that avers ten (10) claims for relief seeking to recover transfers of gold, silver, cash, and real property to Defendants under various theories including recovery of unauthorized postpetition transfers, fraudulent transfers, turnover of estate property, and reverse piercing/alter ego. Count I of the complaint seeks to avoid as post-petition transfers the Debtor’s transfer of more than $1.3 million in gold and silver under 11 U.S.C. § 549(a), and seeks recovery of the gold and silver or its value to the Trustee under 11 U.S.C. § 550(a). Bibliologic filed its answer denying any liability, and filed its brief in opposition to Plaintiff’s motion for summary judgment and its cross motion for summary judgment on Count I, a supporting brief, and its own SOUF combined in the same document with a statement of genuine issues in opposition to the Plaintiff’s motion for partial summary judgment.

Summary judgment is governed by F.R.B.P. 7056. Rule 7056, incorporating Rule 56(c), Fed. R. Civ. P., states that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." "The proponent of a summary judgment motion bears a heavy burden to show that there are no disputed facts warranting disposition of the case on the law without trial." Once that burden has been met, "the opponent must affirmatively show that a material issue of fact remains in dispute."

The pending cross-motions for summary judgment both are based on Count I of the complaint. Count I is based upon § 549(a). To establish a prima facie case under § 549(a), the Trustee must prove that there was: (1) a transfer; (2) of estate property; (3) that occurred after commencement of the case; and that (4) was unauthorized by the bankruptcy code or the court. To the extent a transfer is avoided under § 549, a trustee may recover for the benefit of the estate the property transferred, or the value of such property, from the initial transferee or any subsequent transferee. § 550(a). Under F.R.B.P. Rule 6001, the entity asserting the validity of a transfer under § 549 has the ultimate burden of proof, which in the instant case is Bibliologic.

The Court notes that the cross-motions and briefs disagree on the date when the transfers of the gold and silver coins from Sann to Bibliologic became final. Because the second and third elements under § 549(a) involve whether transfers were of estate property that occurred after commencement of the case, these disputes of fact regarding the date the transfers became final are material to Count I.

This Court concludes that the genuine issues of material fact regarding the date the transfers of gold and silver coins from Sann to Bibliologic became final, viewed along with the undisputed background or contextual facts, are such that a rational or reasonable jury might return a verdict in the non-moving party’s favor based on that evidence, with respect to both cross-motions for summary judgment. Having concluded that both sides failed to satisfy their respective burdens to show absence of genuine issue of material fact on when the transfers of gold and silver coins from Sann to Bibliologic became final, and whether the gold and silver coins are property of the estate, summary judgment will be denied as to both cross-motions for summary judgment and the issues under § 549(a) can be decided after a trial.

Brandon v. Bibliologic, Ltd., October 20, 2015, Robert K. Baldwin, Trent M. Gardner and Kyle W Nelson for Brandon, Sean M. Morris for Bibliologic, Ltd.

2015 Mont. B.R. 481

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B.Y.O.B. Inc.v. State of Montana, United States District Court, Judicial Notice, Immunity, Settlement Agreement

Case no. CV-15-36-M-DWM

Plaintiffs brought this action against the State of Montana, claiming the Department of Revenue ("the Department") intentionally and/or negligently interfered with the prospective sale of an agency liquor store franchise agreement. The Department has not yet answered and has moved to dismiss the Complaint. They also seek judicial notice of certain documents.

In late 2010 or early 2011, B.Y.O.B. was listed for sale through real estate agent Barbara Riley of

Meadow Lake Real Estate, which is an assumed business name of CYA, Inc. Over the next year, "several bona fide offers to purchase B.Y.O.B. were made," but the Department "ultimately prevented realization of the purchase of B.Y.O.B. in each of these instances." One such offer was made by Gildo, LLC, of which Terin and Nathan Gilden are members. Around December 2011, B.Y.O.B. filed for bankruptcy. Sometime around February 2013,1 B.Y.O.B. was sold at auction by the bankruptcy trustee. Beez-Neez, Inc., of which Nathan Gilden is president, "sought to participate in the auction," but the Department "ultimately prevented realization of Beez-Neez’s purchase of B.Y.O.B."

"The court may judicially notice a fact that is not subject to reasonable dispute because it: (1) is generally known within the trial court’s territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." The court may take judicial notice of matters of public record, including documents on file in state and federal courts. Although a court may take judicial notice of a matter of public record, it may not take judicial notice of disputed facts stated in public records. Judicial notice of only two exhibits is warranted at this time. The Settlement Agreement, which was filed in the bankruptcy proceeding, is a public record. Plaintiffs do not dispute its authenticity, do not object to the Court taking judicial notice of it, and attached the document to their response. Plaintiffs also do not challenge judicial notice or the authenticity of the bankruptcy court’s Memorandum of Decision approving the Settlement Agreement, as they attached the document to their reply to the Motion to Strike.

The Memorandum of Decision is a public record, and therefore judicial notice of it is proper.

A. Immunity

The Department’s immunity argument is premature. The Department argues that it is entitled to absolute quasi-judicial immunity "[t]o the extent that any of Plaintiffs’ claims are based on" the Department having previously initiated termination of its Agency Franchise Agreement with B.Y.O.B. The Complaint makes no allegations based on Agency Franchise Agreement settlement discussions. In order to reach the merits of immunity at this stage and perform the proper "functional comparison of the activities performed," a factual inquiry outside the Complaint would need to be made. Such an inquiry is impermissible under Rule 12.

B. Settlement Agreement

The Department maintains that the Complaint should be dismissed because under the terms of the Settlement Agreement entered into between B.Y.O.B. and the Department during the Agency Franchise termination and bankruptcy proceedings, B.Y.O.B. released any claims against the Department. As an initial matter, the only parties to the Settlement Agreement are B.Y.O.B. and the Department. Therefore, it cannot serve as a basis to dismiss the claims of the other plaintiffs. Buttressing the conclusion that B.Y.O.B. did not release its claims against the Department is the bankruptcy court’s clarification in its Memorandum of Decision approving the Settlement Agreement that "[n]othing in this decision prohibits the Glantz family, Gildo, CYA or others from seeking relief against the [Department] for arbitrary conduct or failure to comply with state law." Accordingly, the Department’s motion to dismiss the Complaint on

this basis is denied.

The parties look to matters outside the pleadings that present a more complete picture of the background of this case and flesh out the factual bases for the claims. Yet, the Court will avoid "going down the rabbit hole" and conducting a mini trial on the pleadings at this early stage of the case. Limited judicial notice

of just two of the Department’s documents and exclusion of Plaintiffs’ affidavits and exhibits negates the need to convert the Motion to Dismiss into one for summary judgment and also eliminates any merit in the Motion to Strike. The Department’s immunity argument is premature, and its Settlement Agreement argument fails at this point. The Complaint is insufficiently pled, and nearly every count is dismissed for that reason. There is no clarity in the Complaint regarding the claims of the named plaintiffs. But Plaintiffs are granted leave to amend because amendment may not be futile.

B.Y.O.B Inc. v. State of Montana, September 25, 2015, Lee C. Henning for Plaintiffs,  Rebekah J. French for Defendants

2015 Mont. B.R. 452

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Carpenter v. Montana , Appeal, 9th Circuit BAP (Klein, Pappas, Jury), Priority Claim, Individual Liability for Corporate Officers

(Affirming Carpenter 2014 Mont. B.R. 583)

BAP no. MT-14-1499-KlPaJu

ISSUE ON APPEAL

Whether the claim for a corporation’s unpaid Montana unemployment insurance taxes is an 11 U.S.C. § 507(a)(8)(E) priority claim against vicariously-liable individuals.

Each of the 11 U.S.C. § 507(a)(8) priority tax categories, except trust fund taxes, is temporary and measured by specified lookback periods ranging from 240 days to three years. Taxes older than the lookback periods are non-priority claims that do not necessarily have to be paid in full in a chapter 11 case and that do not automatically give rise to nondischargeable debts. The § 507(a)(8)(C) trust fund provision is unique in three respects. First, there is no lookback limitation. Thus, trust fund taxes are perpetually § 507(a)(8) priority taxes and, hence, are always nondischargeable under § 523(a)(1). Second, it is the only provision in § 507(a)(8) that refers to who is liable for the taxes; it contains the phrase "for which the debtor is liable in whatever capacity." Third, it is focused on a method of collection, rather than describing a separate type of tax. In other words, there really are only five categories of impositions that can be described as taxes or customs duties, all of which are entitled to priority status and potential exception from discharge only if not stale. The sixth, the trust fund tax, category does not constitute a separate type of tax, but rather prescribes circumstances of collection for which priority status and accompanying nondischargeable status is perpetual.

In 1978, the Supreme Court construed the trust fund provision of the 1966 amendment in the context of federal tax liability of responsible parties for withholding taxes. United States v. Sotelo, 436 U.S. 268 (1978). Under Internal Revenue Code § 6672, 26 U.S.C. § 6672, responsible parties are assessed a "penalty" equal to the amount of the tax not paid over. The bankrupt responsible persons objected that they should not be liable for the taxes of the corporation and that the designation of the obligation as a "penalty" made it dischargeable. Although the statute made no reference to responsible officers, the Court held that, despite the designation as "penalty," the essential nature of the debt was a tax for purposes of the Bankruptcy Act, which tax debt is not discharged.

Five months after Sotelo was decided, Congress enacted the Bankruptcy Code of 1978, with the phrase "for which the debtor is liable in any capacity" included in § 507(a)(8)(c). The legislative history explained that the priority section reached the same result as Sotelo. Since the basic reasoning of Sotelo was carried forward into the Bankruptcy Code, that decision retains vitality.

The new 1978 Bankruptcy Code remodeled the tax discharge and priority tax provisions but did not make significant changes. As relevant here, the trust fund tax provision moved from the discharge section to the priority tax section, with the addition of the phrase "for which the debtor is liable in whatever capacity."  This brings us back to our decision in Hansen, which the debtors contend is controlling. It is not. The debtor in Hansen was a responsible officer who was vicariously liable with respect to non-trust fund unemployment insurance taxes that were stale under § 507(a)(8)(E) because they were more than three years old. The debtors in this appeal are responsible officers who are vicariously liable with respect to non-trust fund unemployment insurance taxes that are not stale under § 507(a)(8)(E) because they were less than three years old. Therein lies all the difference.

The liability imposed upon corporate responsible officers by Montana Code § 39-51-1105 is a tax that has the same status as the underlying corporate tax for purposes of § 507(a)(8). Here, it is an "excise" tax under § 507(a)(8)(E) entitled to priority during the three-year period specified in that subsection. As the corporation was not required to collect or withhold the tax from others, it is not a § 507(a)(8)(C) trust fund tax.

Carpenter v. Montana Department of Labor and Industry, November 19, 2015, Harold Van Dye for Carpenter, Joseph R. Nevin for State of Montana

2015 Mont. B.R. 546

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Cutting, Chapter 7, Violation of Discharge Injunction

Case no. 14-60309

A discharge under 11 U.S.C. § 524(a)(2) "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor . . . ." "A party who knowingly violates the discharge injunction [of § 524(a)(2) ] can be held in contempt under [§ ] 105(a) of the [B]ankruptcy [C]ode." A "willful" violation of the discharge injunction can be the basis for a finding of civil contempt, and the imposition of appropriate sanctions, under § 105(a). Under Ninth Circuit law, a violation of the discharge injunction is willful when the alleged contemnor (1) knew that the discharge injunction applied, and (2) intended the actions that violated the discharge injunction. The undisputed facts establish that SCL Health Systems Hospital and St. Vincent Healthcare violated the discharge injunction by knowingly seeking the collection of prepetiti\on debts from the Debtors of debts from which Debtors were discharged of personal liability.

When the court awards reasonable attorney's fees as a sanction, the court must consider two factors: "(1) what expenses or costs resulted from the violation and (2) what portion of those costs was reasonable, as opposed to costs that could have been mitigated. The declaration of Colette Davies is accompanied by a billing statement which details the work Colette Davies performed on behalf of Debtors. The fees of $7,770.00 for the work performed by Colette Davies are approved. Given John Heenan’s failure to file a billing statement that would enable the Court to determine whether his requested fees are reasonable, the Court will award one-half the fees requested by John Heenan, or $2,100.00.

Emotional distress damages are appropriate when a debtor "(1) suffer[s] significant harm, (2) clearly establish[es] the significant harm, and (3) demonstrate[s] a causal connection between that significant harm and the violation of the automatic stay (as distinct, for instance, from the anxiety and pressures inherent in the bankruptcy process)." The Court finds and concludes that Debtors satisfied their burden of clearly establishing that they suffered significant harm, and they demonstrated a causal connection between that significant harm and the collection notices sent by SCL Health Systems Hospital and St. Vincent Healthcare after Debtors’ discharge. Even if a violation of the discharge injunction is not egregious, a debtor may recover emotional distress damages that arose from a discharge injunction and a debtor may establish emotional distress damages without corroborating evidence if the circumstances make it obvious "that a reasonable person would [have suffer[ed] significant emotional harm." In this Court’s view, the circumstances in the instant case make it obvious that a reasonable person would have suffered significant emotional harm. the Court awards Debtors the sum of $100 for each violation of the discharge injunction, or $1,100.00, in emotional distress damages. Debtors have not shown that the balance of their punitive damage claim is necessary to coerce rule enforcement.

In re Cutting, July 15, 2015, Colette Davis and John Heenan for Cutting

2015 Mont. B.R. 390

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Dck Worldwide Holdings Inc., v. CH SP Acquisition LLC, Montana Supreme Court, Construction Lien

The statutes governing construction liens are codified in Title 71, chapter 3, part 5 of the Montana Code Annotated. Section 71-3-526(1), MCA, entitles a "person who has furnished services or materials pursuant to a real estate improvement contract" to a construction lien for the "unpaid part of the person’s contract price." In turn, § 71-3-522, MCA, defines "contract price" as the "amount agreed upon by the contracting parties for performing services and furnishing materials covered by the contract, increased or diminished by: (i) the price of change orders or extras; (ii) any amounts attributable to altered specifications; or (iii) a breach of contract, including but not limited to defects in workmanship or materials."

In light of Worldwide’s argument that it is entitled to broadly claim "the entire contract price," it should first be clarified that the lien statutes permit claims for "the amount agreed upon by the contracting parties for performing services and furnishing materials covered by the contract." Section 71-3-522(3)(a), MCA (emphasis added). By using this language, the Legislature was authorizing liens only for the unpaid amounts of services and materials provided under a construction contract, and not other items. While most construction contracts may primarily provide for services and materials, it is clear that the Legislature did not tie authority to lien to the total amount of the construction contract, but to the unpaid amounts for services and materials provided therein. Further, CHSP’s argument that construction liens are limited to services that are actually performed and materials that are actually furnished is well supported by the text, structure, and purpose of the lien statutes. As noted above, § 71-3-522(3)(a), MCA, defines "contract price" as the amounts the contracting parties have agreed to "for performing services and furnishing materials." Section 71-3-526, MCA, permits a person to lien the "unpaid part" of the contract price, but "subject to the provisions of 71-3-524." In turn, § 71-3-524, MCA, limits lienable materials to those that: (1) "are supplied with the intent that they be used in the course of construction of or incorporated into the improvement"; and (2) are "incorporated in the improvement or consumed as normal wastage in construction operations"; "specifically fabricated for incorporation into the improvement"; or "used for the construction or operation of machinery or equipment used in the course of construction and not remaining in the improvement." Thus, § 71-3-524, MCA, expressly prohibits a contractor from including within its lien amounts for a claim of materials that the contractor has not furnished.

Further, the requisite procedures for perfection of a construction lien contemplate work the contractor has completed. Section 71-3-532, MCA, governing the content of the notice of right to claim, provides: "The notice of the right to claim a lien must be in In reaching these conclusions, we underscore the difference between what Dick could have recovered in a breach of contract action against Spanish Peaks, and what recovery is permissible in a construction lien situation. Under the language of the cost-plus contract between Dick and Spanish Peaks, Dick was entitled to the entire contractor’s fee in the event the contract was terminated. Once Spanish Peaks went into bankruptcy, however, Dick was compelled to pursue foreclosure of its construction lien against Citigroup, a non-party to the construction contract. For the reasons stated herein, we hold the District Court erred by holding that the unpaid contractor’s fee claimed by Worldwide was properly lienable under the lien statutes.

Dck Worldwide Holdings Inc., v. CH SP Acquisition LLC, August 4, 2015, Randy Cox for Worldwide, Dorie Refling and Jessica Hodges for CH SP Acquisition

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Eeds, Chapter 7, Violation of Automatic Stay, Sanctions

Case no. 14-61005

David Eeds is employed in the oil industry in the "Bakken Formation" at Williston, North Dakota. Eeds testified that while he was in Mesa, Arizona, he owned a car which was repossessed by a creditor. That creditor sued Eeds for the unpaid balance and obtained a judgment against him in the Arizona court. The judgment debt was turned over to CF Capital for collection, and CF Capital put in place a garnishment against Eeds’ wages in North Dakota. Eeds testified that his attorney contacted CF Capital and asked it to cease garnishment of his wages, but CF Capital did nothing to stop the garnishment. Debtor’s attorney Winner then called Debtor’s employer’s payroll office and got the garnishment stopped. Eeds testified that CF Capital has refused to refund the $1,309.22 in total wages garnished post-petition.

The long-standing rule followed by this and other courts is that a violation of the stay is willful if (1) the creditor knew of the stay and (2) the creditor’s actions which violated the stay were intentional. The Ninth Circuit noted that § 362(k) provides for damages for willful violation of the stay upon a finding that the defendant knew of the automatic stay and that the defendant’s actions, which violated the stay, were willful. "Once a creditor or actor learns or is put on notice of a bankruptcy filing, any actions intentionally taken thereafter are ‘willful’ within the contemplation of § 362([k])." Given the broad, self-executing, automatic stay described above, the Court found that CF Capital willfully violated the automatic stay when it continued garnishment of Debtor’s wages after the date he filed his Chapter 7 petition. CF Capital failed its affirmative duty to remedy the violation. The Court finds that the total amount of actual damages caused by CF Capital’s willful violations of the stay is $2,743.30.  The evidence reflects CF Capital’s complete failure to comply with the stay and respond to communications by Debtor’s attorney aimed at curing the stay violations. In this Court’s view this is sufficient evidence of reckless or callous disregard by CF Capital for the bankruptcy stay and Eeds’ rights to impose punitive damages. This Court agrees that a significant award of punitive damages is warranted in this case, but declines to award treble damages. The Court awards Eeds $1,000 in punitive damages against CF Capital for its reckless and callous disregard for the automatic stay and Eeds’ rights.

The Court must examine whether the Debtor could have mitigated his damages, and in determining the appropriate amount of attorney’s fees to award courts look "to two factors: (1) What expenses or costs resulted from the violation; and (2) what portion of those costs was reasonable, as opposed to costs that could have been mitigated." Eeds’ attorney’s fees incurred attempting to recover his wages garnished by CF Capital in willful violation of the stay are fully recoverable.

In re Eeds, March 16, 2015, D. Randy Winner for Eeds

2015 Mont. B.R. 103

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Endobiologics, Inc., Chapter 7, Reconsideration, Sale of Estate Property

Case no. 13-61134

A notice was sent to the creditors, advising creditors that they must file a proof of claim with the U.S. Bankruptcy Court in order to share in distribution of assets or be forever barred. Chaykin prepared a proof of claim in the amount of $100,663.76 based on a settlement agreement with the Debtor and its parent corporation EndoBiologics International Corporation. However, instead of filing his proof of claim with the bankruptcy court he sent it to the Trustee Samson, where it sat in Samson’s files until it was discovered after the claims bar date had expired. When the Trustee discovered 1 Chaykin’s proof ofclaim in his records, he forwarded it to the clerk’s office.

On August 21, 2014, the Trustee filed a notice of intent to sell the 4 Patents to Gustafson for $100. Doc. 12 provides that if the Trustee receives an upset bid within 14 days, the Trustee would then notify "all persons who have expressed an interest in purchasing" the 4 Patents of the date, time and location where the Trustee would conduct an auction and sell the patents to the highest bidder. the Trustee filed his notice of Chaykin’s upset bid. The Court entered its Order, Doc. 15, on September 10, 2014, authorizing the Trustee to proceed with the auction sale of the 4 Patents.

Gustafson’s motion essentially is a motion for reconsideration of this Court’s Order. "A motion for reconsideration should not be granted, absent highly unusual circumstances, unless the district court is presented with newly discovered evidence, committed clear error, or if there is an intervening change in the controlling law." Gustafson’s contention that the creditors will receive greater intangible benefit by vacating the Order authorizing the auction sale and allowing him to purchase the 4 Patents for $100 and then donate them to a research university, runs contrary to the Supreme Court’s admonition that the trustee "the duty to maximize the value of the estate." This Court’s Order authorizing the Trustee to conduct an auction sale of the 4 Patents will increase the value realized by the estate from the patents at least twenty fold, if Chaykin’s $2,000 upset bid is the winning bid at auction. The Court finds and concludes that Gustafson failed to show that this Court committed clear error in entering its Order authorizing the Trustee to conduct an auction sale.

In re Endobiologics, Inc., February 24, 2015, Richard Samson, Trustee, Gray Gustafson, pro se.

2015 Mont. B.R. 72

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Fitterer v. Mullin and A&C, Montana Supreme Court, Contract, Sales, Agency, Prejudgment Interest

Case no. DA 15-0158

Fitterer argues that this was a contract for the sale of goods and is therefore governed by Chapter 2 of Montana’s Uniform Commercial Code (UCC), §§ 30-2-101 et seq., MCA. "‘Goods’ means all things . . . which are movable at the time of identification to the contract for sale." Section 30-2-105(1), MCA. Fitterer contends this includes fertilizer and chemicals used for agricultural purposes. We agree. "[T]he U.C.C. rules governing sales agreements are far more permissive . . . than the general common law rules governing contract formation." A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract." Section 30-2-204(1), MCA. A&C ordered, accepted, and used the deliveries of fertilizer and orders of chemicals from Fitterer. This was sufficient to show agreement, and create a valid, binding contract under Montana’s UCC.

A&C notes that Zach has never been employed by A&C, and A&C maintains that Zach did not have authority to make purchases on behalf of A&C. "An agent is one who represents another, called the principal, in dealings with third persons." Section 28-10-101, MCA. "An agency is ostensible when the principal intentionally or by want of ordinary care causes a third person to believe another to be the principal’s agent when that person is not really employed by the principal." Section 28-10-103(1), MCA. "Pursuant to this statutory definition of ostensible agency, it must be the principal, not the agent, who ‘intentionally or by want of ordinary care causes a third person to believe another to be his agent.’" Agency can also be created "by a precedent authorization or a subsequent ratification." Section 28-10-201, MCA. Agency can also be created "by a precedent authorization or a subsequent ratification." Section 28-10-201, MCA. Whether intentionally or by want of ordinary care, Clint rendered Zach an ostensible agent of A&C. A&C accepted and used the fertilizer and chemicals ordered by A&C’s agent, Zach. A valid, binding contract for the sale of goods existed between A&C and Fitterer.

"A party is entitled to prejudgment interest when three criteria are met: (1) the existence of an underlying monetary obligation; (2) the amount of recovery is certain or capable of being made certain by calculation; and (3) the right to recover the obligation vests on a particular day." The dispute at issue here satisfies the three requirements we articulated in DiMarzio: (1) there was a clear underlying monetary obligation—A&C’s balance due on Account No. 1577; (2) the amount due on Account No. 1577 was "capable of being made certain" by calculating the amounts due on each order, subtracting the payments A&C did make, and applying the applicable interest; and (3) the right to recovery vested on the dates the accounts became due per the terms of the statements.

Fitterer v. Mullin and A&C, September 15, 2015, Ben T. Sather for Fitterer, Nicholas C. Grant for Mullin and A&C

2015 Mont.B.R. 440

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Fix, Chapter 13, Lien Avoidance, Homestead

Case no. 15-60251

Debtors move to avoid the judicial liens of Kinney, Olson Estate and CBS under § 522(f)(1)(A), which provides that "a debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is – (a) a judicial lien." Under § 522(f)(1), "a debtor may avoid a lien if three conditions are met: (1) there was a fixing of a lien on an interest of the debtor in property; (2) such lien impairs an exemption to which the debtor would have been entitled; and (3) such lien is a judicial lien."

Kinney argues that Debtors’ interest in the Florence homestead ended when they moved to Arizona and established an automatic homestead exemption in Arizona by state statute. A claimant is entitled to temporarily vacate a homestead premises for such things as employment, as Timothy did, and still claim a homestead exemption. Beverly only briefly stayed in her motorhome on the Arizona property, then she returned to Montana. The sale to Fontaines has not closed. Beverly’s testimony is that if the Fontaines default under the buy sell agreement, the Fixes will return to 21335 Old Highway 93 and resume residence in their homestead.

Fixes used $30,000 of the $40,000 received from the Fontaines to make their down payment on the Arizona property and the other $10,000 is traceable to the proceeds from the pending sale of their homestead to Fontaines. The proceeds are traceable from the sale of Debtors’ Montana homestead and are exempt for 18 months under § 70-32-216(1). Debtors’ claims of exemptions of homestead and traceable homestead proceeds do not exceed the $250,000 limit. In sum, based upon the language of MCA §§ 70-32-101, 70-32-104, 70-32-201 ("Homestead exempt from execution generally") and 70-32-216(1) and under the liberal construction of those statutes under the Montana Constitution, this Court concludes that the Debtors have shown that they are entitled to their claims of homestead exemption in 21335 Old Highway 93 in Florence, Montana, and traceable proceeds therefrom, in an amount not to exceed $250,000 in value.

Under § 522(f)(2)(A), a lien shall be considered to impair an exemption to the extent that the sum of: (i) the lien, (ii) all other liens on the property, and (iii) the amount of the exemption that the debtor could claim if no liens existed on the property, exceeds the value that the debtor’s interest in the property would have in the absence of any liens. All of the liens against Debtors’ homestead total $270,654.48. Adding to that sum the Debtors’ $250,000 allowable exemption results in an amount of $520,654.48. Under the formula of § 522(f)(2)(A), the judicial liens of CBS, Kinney and the Olson Estate impair Debtors’ exemption to the extent that $520,654.48 exceeds the value of the Debtors’ interest, shown by Stipulated Fact 17 as $335,000, which results in an impairment to the extent of $185,654.48. The result is that the judicial liens of CBS, Kinney and the Olson Estate, which together total $63,603.49, are avoidable in their entire amount under § 522(f)(1)(A).

In re Fix, November 30, 2015, Daniel S. Morgan for Debtors, Harold V. Dye for Estate of Olson, Raymond Tipp for Kinney

2015 Mont. B.R. 581

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Fratzke, Chapter 13, Homestead, Contiguous Parcel, Abandonment

Case no. 15-60186

Les Schwab Warehouse Center, Inc. ("Les Schwab"), objects on the grounds the Debtor’s declaration of homestead on her residence and certain "Surrounding Property" is invalid because she did not abandon a prior recorded homestead on her residence before recording a second homestead declaration whichadded approximately 103 acres of "Surrounding Property" which Debtor’s spouse inherited. Debora testified that Ross acquired approximately 103 acres of "Surrounding Property" around their Residence in December of 2013, but that they have used the Surrounding Property since 2002 for haying, logging and in an outfitting business to earn income to support and maintain their homestead. Ross testified that the two parcels are contiguous; the Surrounding Property always was intended to support the Residence. He testified that his grandfather let him use the Surrounding Property for logging, haying and outfitting, before Ross received title to it. Les Schwab objects that Deborah does not reside on the Surrounding Property and no residence exists on the Surrounding Property, which the Debtor and Ross use for agricultural and other commercial purposes. Additionally, Les Schwab objects on the grounds that the Debtor did not abandon the first declaration of homestead on her Residence, which was recorded on October 3, 2013, pursuant to MCA § 70-32-302, and that, thus, the second Declaration of Homestead, which includes the Residence and Surrounding Property is invalid.

Debora’s parenthetical reference to the second declaration of homestead on Schedule C was not improper, since it gives the reader guidance about where to find the recorded declaration of homestead for the Residence. More importantly, it was not improper for Ex. 3 to include the Surrounding Property owned solely, according to Ex. 2, by Ross. MCA § 70-32-103 provides in pertinent part: "From whose property homestead may be selected. If the claimant is married, the homestead may be selected from the property of either spouse." This statute authorized Debora and Ross to select their homestead from the property of either of them, or both. They included in Ex. 3 their jointly owned Residence and Ross’s Surrounding Property as authorized by MCA § 70-32-103.

The Surrounding Property provided the logs they used to build their Residence and provides their Residence with water, wood for heating, fencing, and income from haying, logging and their outfitting business to support their homestead, both before Ross owned the Surrounding Property and to the present. The Surrounding Property provides the means "to secure a home beyond the reach of financial misfortune" for Debora’s Residence by providing fuel, water and income. The evidence is uncontroverted that Debora and Ross have used the Surrounding Property for years for building logs, fuel, and water and to generate money to maintain their homestead on the Residence, from long before Ross acquired the Surrounding Property from his family. MCA § 70-32-103 authorizes them to select their homestead from the property of either of them, which they did on Ex. 3. Debora claimed the same Residence as a homestead as described on Ex. 1, Ex. 3 and her Schedule C. Debora and Ross added to their homestead by recording Ex. 3. Most importantly, no evidence exists that Debora abandoned the homestead at Residence claimed on Ex. 1. She and Ross have lived in the Residence since 2002 and continue to live in the Residence. Therefore, no declaration of abandonment of the Residence was required,11 and Les Schwab’s objection based on failure to record a declaration of abandonment is not well taken.

In re Fratzke, August 10, 2015, Daniel S. Morgan for Fratzke, Michael F McGuiness for Les Schwab

2015 Mont. B.R. 423

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Golz, Montana Supreme Court, Chapter 7, Exempt Property, Inherited IRA

Item number 12 on Golz’s Schedule B is a "MorganStanley [sic] IRA. Acct. #319-116461-409" valued at $6,905.65. Golz inherited the Individual Retirement Account (IRA) from his mother upon her death. Golz claimed the inherited IRA as exempt property from the bankruptcy estate. Womack objected to Golz’s claim of exemption. Golz has made no personal contributions to the inherited IRA, and he cannot invest additional money in the account. Golz is required to withdraw money from the inherited IRA account no matter how far he is from retirement. Golz may withdraw the entire balance of the account at any time and use it for any purpose without penalty.

When a debtor files for bankruptcy, an estate is created consisting of all legal and equitable property interests of the debtor as of the date of filing. A debtor is allowed to exempt certain property from the bankruptcy estate. Property that may be exempted in a bankruptcy proceeding in Montana includes property described in Title 25, chapter 13, part 6, of the Montana Code Annotated. Relevant to the certified question before us, § 25-13-608(1)(e), MCA, provides that debtors may claim exemptions, without limitation, in "individual retirement accounts, as defined in 26 U.S.C. 408(a), to the extent of deductible contributions made before the suit resulting in judgment was filed and the earnings on those contributions . . . ."

The U.S. Supreme Court has defined an inherited IRA as "a traditional or Roth IRA that has been inherited after its owner’s death.""When anyone other than the owner’s spouse inherits the IRA, he or she may not roll over the funds; the only option is to hold the IRA as an inherited account." Golz argues that, because Montana’s exemption laws are to be interpreted liberally, an inherited IRA should be exempt like other IRAs. However, in Clark, the U.S. Supreme Court held that inherited IRAs are not retirement funds exempt from a bankruptcy estate under 11 U.S.C. § 522(b)(3)(C), and the Court distinguished traditional and Roth IRAs defined in 26 U.S.C. §§ 408(a) and 408A, from inherited IRAs.

The Montana Legislature also distinguished traditional and Roth IRAs from inherited IRAs. In § 25-13-608(1)(e), MCA, the Legislature exempted IRAs "as defined in 26 U.S.C. 408(a)" and Roth IRAs "as defined in 26 U.S.C. 408A." The Legislature did not exempt IRAs defined in other subsections of 26 U.S.C. § 408. In Clark, the U.S. Supreme Court distinguished traditional and Roth IRAs defined in 26 U.S.C. §§ 408(a) and 408A, from inherited IRAs. Inherited IRAs are not defined in 26 U.S.C. § 408(a) or § 408A. Rather, inherited IRAs are financial accounts with distinct legal characteristics addressed in other sections of Title 26, as outlined above.

Our answer to the certified question is: No, under Montana law, a debtor may not claim an exemption in an inherited IRA pursuant to § 25-13-608(1)(e), MCA.

In re Golz, November 10, 2015, James J. Screnar for Golz, Joseph V. Womack, Pro se

2015 Mont. B.R. 540

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Gotcher v. Duffie, Chapter 13, Adversary Proceeding, Summary Judgment

Case no. 13-61593, Adversary no. 14-00013

Section 523(a)(2)(A) provides that, "a discharge under . . . this title does not discharge an individual debtor from any debt – (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by – (A) false pretenses, a false representation, or actual fraud, . . . ." To prevail on a § 523(a)(2)(A) claim, a creditor must establish five elements:

(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the creditor proximately caused by its reliance on the debtor's statement or conduct.

The first three elements of § 523(a)(2)(A), when taken together, establish the element of intent to deceive, which the creditor must establish by a preponderance of the evidence. In other words, a creditor must establish that a debtor knowingly made a false representation, either express or implied, with the intent of deceiving the creditor. The Plaintiffs, as the alleging party, must prove the elements of misrepresentation and reliance directly and by a preponderance of the evidence and not by reference to the totality of the circumstances. As to the remaining elements, a creditor sustains its burden of proof under §523(a)(2)(A), if a Court, after considering the facts and circumstances of a particular case, answers the following two inquiries in the affirmative: 1) did the creditor justifiably rely on the debtor’s representation–reliance; and 2) was the debt sought to be discharged proximately caused by the first two elements–causation. Finally, to prevail under 11 U.S.C. § 523(a)(2)(A), a creditor must establish that a claim sought to be discharged arose from an injury proximately resulting from his or her reliance on a representation that was made with the intent to deceive.

Debtor claims that summary judgment is appropriate because Plaintiffs only identify two misrepresentations in the Co-Ownership Agreement, the purchase price of the theaters and reference to Debtor and Stephen Michael as co-owners of the theater properties in Butte and Bozeman, and that the misrepresentations were not material, no harm flowed from such misrepresentations, and that Plaintiffs did not rely on the misrepresentations. Plaintiffs counter that the misrepresentations made by Stephen Michael and Debtor, through her silence, were extreme and extended beyond those discussed by Debtor in her motion for summary judgment. Based upon the record, the Court finds that material issues of fact precludes summary judgment on Plaintiffs’ § 523(a)(2)(A) claim.

Gotcher v. Duffie, January 5. 2015, Kevin E. Vainio for Gotcher, Mark Hilario and James C White for Duffie

2015 Mont. B.R. 1

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Gotcher v. Duffie, Chapter 13, Adversary Proceeding, Dischargability

Case no 13-61593, Adversary no. 14-00013

Trial in this matter was held in Butte on Plaintiffs’ claim to except $88,348.611 from the Debtor/Defendant’s discharge pursuant to 11 U.S.C. § 523(a)(2)(A). Section 523(a)(2)(A) provides that, "a discharge under . . . this title does not discharge an individual debtor from any debt – (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by – (A) false pretenses, a false representation, or actual fraud, . . . ." To establish a claim for an exception to discharge under this provision requires a creditor to demonstrate the existence of five distinct elements by a preponderance of the evidence:14 (1) the debtor made representations; (2) that at the time the debtor knew they were false; (3) that the debtor made them with the intention and purpose of deceiving the creditor; (4) that the creditor justifiably relied on such representations; and (5) that the creditor sustained the alleged loss and damage as the proximate result of the misrepresentations having been made. The Ninth Circuit has concluded that the nondisclosure of material information in the context of a business transaction will support an exception to discharge claim under § 523(a)(2)(A), analogizing such a situation to securities fraud.

What is troubling, and what the undisputed evidence does show, is that Duffie had virtually no equity in either the Covellite or the Rialto Theaters. While the Co-Ownership Agreement references a mortgage, Duffie represents in the Co-Ownership Agreement that she and Stephen Michael would "contribute one-million dollar USD ($1,000,000) guaranteeing their combined ninety percent (90%) ownership interest." No time frame is stated for either the Plaintiffs or for Duffie and Stephen Michael to make their contributions of $140,000 and $1million, respectively. However, any contributions Duffie and Stephen Michael made were woefully short of $1 million. In fact, as to the Rialto Theater, the evidence shows that as of August of 2013, Duffie’s equity interest was a mere $10,023.64.15 Even if Duffie contributed all her monthly net income, shown as $1,394.50 in her schedules, to the Theaters, it would take Duffie well in excess of five years to contribute $1,000,000 toward the business venture with the Plaintiffs.

The undisputed evidence also shows that Duffie, in concert with Stephen Michael, negotiated to sell, as of September 8, 2011, a ten percent interest in the Rialto and Covellite Theaters to the Plaintiffs. Although Duffie did not sign the September 8, 2011, Co-Ownership Agreement, Duffie received benefits from the Co-Ownership Agreement and she sought to enforce the Co-Ownership Agreement against the Plaintiffs. Plaintiffs have established that Duffie knowingly made false representations with the intent of deceiving Plaintiffs. As stated above, Plaintiffs, Duffie and Stephen Michael negotiated an agreement whereby Plaintiffs would have a 10% ownership interest in the Covellite and Rialto Theaters for a price of $140,000; the Co-Ownership Agreement states such. However, Duffie testified at the Rule 2004 examination that she had no intention of transferring ownership of the Theaters to the Plaintiffs, and indeed, ownership was not transferred. Instead, what the evidence shows, is that Duffie and Stephen Michael engaged in a scheme to siphon as much cash as possible from the Plaintiffs under the pretense that they were selling to the Plaintiffs a 10% interest in the Theaters. Plaintiffs justifiably relied on Duffie’s representation that she would transfer a 10% ownership interest in the Theaters to Plaintiffs. Plaintiffs suffered damages as a result of Duffie’s failure to transfer a 10% ownership interest in the Theaters to Plaintiffs, as set forth in the Co-Ownership Agreement. Therefore, Plaintiffs are entitled to judgment in this matter under 11 U.S.C. § 523(a)(2)(A).

Gotcher v. Duffie, June 3, 2015, Kevin E. Vainio for Gotcher, Mark Hilario for Duffie

2014 Mont. B.R. 298

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Hardin & Company LTD.,  Chapter 7, Compromise

Case no. 13-60413

The stipulation and settlement agreement between the Trustee and the Hardin Parties presently before the Court provides for a payment by the Hardin Parties to the bankruptcy estate of $110,000 and consent to subordination of Hardin’s Proof of Claim No. 3 to the allowed claim of Stafford/Lovgren. The Trustee estimates in his motion that Stafford/Lovgren will receive a payment of $47,800.00 toward their allowed claim of $91,447.11. Stafford/Lovgren opposes approval of the Trustee’s settlement with the Hardin Parties arguing the settlement is a windfall to Hardin. Gerovac opposes approval of the settlement arguing she is not receiving the benefit of the settlement she entered into with the Trustee.

Compromises and settlements are governed by FRBP 9019(a), which provides in pertinent part: "On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement . . . ." this Court addressed the test for approving compromise agreements and settlements under Rule 9019(a):

(a) The probability of success in the litigation;

(b) the difficulties, if any, to be encountered in the matter of collection;

(c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it;

(d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.’

The Court is not persuaded that the Trustee’s proposed settlement with the Hardin Parties is at odds with the Trustee’s settlement with Gerovac, as approved with conditions by this Court. Stafford/Lovgren’s objections remain. The Trustee concedes in his motion that he "believes there is a good probability of success"6 and that the "litigation is not particularly complex[.]" With this concession, two A&C Properties factors remain: the potential difficulties associated with collecting on any judgment, the additional delay and expense attending further litigation and the paramount interest of the creditors and a proper deference to their reasonable views.

The Court now considers the remaining two A&C Properties factors. The Court can appreciate that sometimes, some recovery is better than nothing for creditors. However, the Court must find that a settlement is fair and equitable to the bankruptcy estate and its creditors. Stafford/Lovgren, the only non-insider party to file a proof of claim in this case, opposes approval of the Trustee’s settlement with the Hardin Parties. At this juncture, Stafford/Lovgren is not daunted by risk, inconvenience or delay, as it has already endured such since October 31, 2011, when Hardin commenced the State Court Action. Rather, Stafford/Lovgren believes that pursuing a judgment against the Hardin Parties will result in a better outcome for the non-insider creditors in this case. Based upon the evidence presented, the Court finds that Stafford/Lovgren’s refusal to endorse the Trustee’s settlement with the Hardin Parties is not unreasonable given that the Trustee’s settlement was reached with an insider without Stafford/Lovgren’s participation. For the reasons discussed, the Court finds that the Trustee’s agreement with the Hardin Parties fails to satisfy the A&C Properties factors.

In re Hardin & Company,LTD., April 29, 2015, James A. Patten for Womack, Quentin M. Rhoades for Hardin Parties, Bruce Jacobs for Stafford/ Lovegren, Jennifer Farve for Gerovac

2015 Mont. B.R. 181

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Herbert v. PHH Mortgage, Chapter 7, Adversary proceeding, Dismissal

Case no 13-60193, Adversary no. 15-00007

Herbert initiated this adversary proceeding by filing a complaint and filed on the same date a motion to stay or remove state court proceedings pending Ravalli County. The complaint avers nine claims for relief, including: One (claims for violations of the automatic stay under 11 U.S.C. § 362(a); Two (alleging violations of the Telephone Consumer Protection Act – 47 U.S.C. § 227(b); Three (violations of the Montana Consumer Protection Act); Four (Trespass violation under Montana law); Five (Negligence); Six (Negligent Misrepresentation); Seven (Actual/Constructive Fraud); Eight (Breach of Contract); and Nine (Punitive Damages – Mont. Code Ann. § 27-1-221(1)). PHH filed an objection to Herbert’s motion to remove or stay state court foreclosure proceedings, and filed a motion to dismiss this adversary proceeding under Fed. R. Civ. P. 12(b)(1) and 12(b)(6) (applicable in this adversary proceeding under F.R.B.P. 7012) on the grounds this Court lacks subject matter jurisdiction over Herbert’s claims for relief

based on state law and nonbankruptcy federal statutes, and that Herbert’s claims based on violations of the automatic stay and violations of the discharge injunction should be addressed as contested matters in the main bankruptcy case instead of in an adversary proceeding.

This Court has exclusive jurisdiction of the above-captioned chapter 7 bankruptcy case, and the allegations of Count One of the complaint alleging violations of the automatic stay are related to this bankruptcy. 28 U.S.C. § 1334(a) & (b). Debtor’s motion for contempt and Count One seeking relief for violations of the automatic stay are core proceedings under 28 U.S.C. § 157(b)(2). Counts Two - through - Nine are non-core proceedings. PHH frames its motion to dismiss as based on a lack of jurisdiction, based upon the decision by the United States Supreme Court in Stern v. Marshall, __ U.S. __, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). The Supreme Court in Stern wrote that § 157 allocates the authority to

enter final judgment between the bankruptcy court and the district court. "That allocation does not implicate matters of subject matter jurisdiction." However, the Supreme Court concluded that bankruptcy courts lack the constitutional authority to enter final judgments on state law counterclaims that are not resolved in the claims allowance process.

Counts Two through Nine of Plaintiff’s complaint are based on nonbankruptcy federal and state statutes. PHH did not file a proof of claim in Herbert’s chapter 7 case; thus, its claim was not part of the claims allowance process. The Supreme Court held that bankruptcy courts lack the constitutional authority to enter final judgments on state law counterclaims that are not resolved in the claims allowance process. While Count One of Herbert’s complaint may be equitable in nature, some of her other eight claims for relief are based on federal or state statutes, so PHH arguably has a right to trial by jury. The Court deems judicial economy and the parties’ interests are better served litigating their claims in a different forum.

Herbert v. PHH Mortgage Corporation, November 5, 2015, Beth Hayes and Flint Murfitt for Herbert, Doug James for PHH Mortgage

2015 Mont. B.R. 534

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Hunter, Relief from Stay, Cause

Case no. 14-61404

In 2011, 623 filed suit against Todd, his mother and the Trust in the Montana Nineteenth Judicial District Court, seeking to set aside fraudulent transfers, including the transfer of the 42-acre and 24-acre parcels to Todd, in order to recover on its judgment. The state district court granted 623's motion for summary judgment, concluding that the 42-acre parcel and 24-acre parcels were subject to 623's writ of attachment. The Montana Supreme Court affirmed, and concluded in an unpublished decision on October 21, 2014,1 that the 2008 transfer of the Montana property to Todd was a fraudulent transfer and that the Montana property, including the 42-acre parcel and 24-acre parcel, was subject to execution by 623.

Both of 623's Motions to Modify Stay are based upon 11 U.S.C. § 362(d)(1) for "cause," and § 362(d)(2) which requires that the debtor does not have an equity in the subject property and such property is not necessary to an effective reorganization. Except for the issue of the Debtor’s equity in the property, in a proceeding on a motion to modify the automatic stay the Debtor has the burden of proof to show that the stay should not be modified or annulled.

The Montana Supreme Court’s decision revesting the property in the Trust, including the 42-acre parcel, is a final decision on the merits of the ownership of the 42-acre parcel. The issue decided by the state courts that the Debtor has no ownership interest in the 42-acre parcel is identical to the issue of Debtor’s equity in the 42-acre parcel. If the Debtor has no ownership interest, then he can have no equity in the property. The Debtor is a defendant in DV-11-94. Thus, 623 has satisfied its burden under § 362(g) to show that the Debtor does not have any equity in the 42-acre parcel and the burden is on the Debtor to show that the stay should not be modified. This Court decides that the Debtor has not satisfied his burden.

Once a prima facie case has been established, the burden shifts to the Debtor to show that relief from the stay is not warranted. Based upon the decision of the Montana Supreme Court revesting the Montana property in the Trust subject to execution by 623 on its final judgment, this Court concludes that 623 has established a colorable claim and a prima facie case that cause exists to lift the stay under § 362(d)(1) both to allow 623 to proceed with levy on execution of its judgment against the 24-acre parcel and the 42-acre parcel, as requested in its Third Motion to Modify Stay, and to return to state district court for a decision on the Debtor’s claim for an offset as requested in its Second Motion.

The Court agrees with 623's counsel that granting its Motions is the better way to prod this Chapter 13 case forward. The offset issue in DV-11-94 awaits only relief from the stay for the state court to proceed with a hearing and decision, for which there is only a single level of appeal available in state court. While final decisions of the state court will not likely be the subject of claim preclusion, it is possible that additional issue preclusion may result from the state court proceedings, simplifying and clarifying the remaining issues to be decided in Adv. 15- 10. For that reason, in the interest of judicial economy this Court will hold Adv. 15-10 in abeyance pending a final decision on the offset issue in DV-11-94.

In re Hunter, August 6, 2015, Jon R. Binney for Hunter, Dean A. Stensland for 623 Partners

2015 Mont. B.R. 412

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Jurgens, Chapter 13, Eligibility, Regular Income Requirement

Case no. 15-60592

Schedule I lists the Debtor is employed as a member/self-employed by WestPac, in Kirkland, WA, for the past 5 years. Her monthly income from WestPac is listed at $0. Other income on Schedule I is $6,700.00 per month in support from Brenda’s daughter and son-in-law. However, Brenda testified that currently she is not receiving that $6,700 from her daughter, and that they withdrew their offer of support since they didn’t want Martin to sue them. Brenda testified that she is expecting a job offer any day now to make future plan payments, but she would not identify that prospective employer because of the nature of her work and because she expects the employment offer to include a non-disclosure agreement. She estimated her income from the first job offer at between $8,000 to $12,000 per month and she expects a job offer within the next two weeks. In addition to that job offer, she testified that she has a back up job offer from an entity she identified as CPRE CURE if the first offer falls through.

Martin and Victor Properties filed their motion for conversion on the grounds the Debtor is not an individual with regular income and because her liquidated, unsecured debts exceed the $383,175 limit of § 109(e). "[A] debt is noncontingent if all events giving rise to liability occurred prior to the filing of the bankruptcy petition." Under this definition, the debts owed by Brenda to Martin and Victor Properties are noncontingent because all events giving rise to liability occurred prior to the filing of the bankruptcy petition. The claims of Martin and Victor Properties are unliquidated, because a determination of liability in the Texas litigation will require an extensive and contested evidentiary hearing involving substantial evidence. Accordingly, it is premature to decide whether the Debtor’s unsecured debts exceed the eligibility limits of § 109(e).

The long-standing rule in this Court is that the bankruptcy petition date governs eligibility requirements and is the guidepost in establishing a person’s rights in bankruptcy. Thus, according to Debtor’s Schedules, SOFA, and her testimony, she is unemployed and currently receives no regular income. While she may be owed by WestPac, recovery of that income according to the Debtor must await the outcome of litigation. Based on the evidence in the record at this time, the Court finds that the Debtor is not an individual with regular income as required for eligibility for Chapter 13 under § 109(e) because she has no income at this time, and her only source of plan payments are from the sale of assets, including her residence. The evidence shows that her income is too irregular and too low to allow for plan payments. The Court concludes that Debtor’s lack of eligibility is "cause" for conversion under § 1307(c). For present purposes, the Court finds that conversion of the case is in the best interests of creditors and the estate in order to preserve the equity in Debtor’s residence pending an orderly liquidation. Despite the above, in the interests of justice and based on the Debtor’s testimony that she may find employment in the immediate future, this Court deems it an appropriate exercise of its discretion to delay the entry of its conversion order in this case and to hold another evidentiary hearing on November 5, 2015, to give the Debtor an opportunity to show by sufficient evidence that she has found employment which is reasonably predictable and sufficient to make the proposed plan payments so as to be an individual with regular income eligible for Chapter 13 relief under § 109(e).

In re Jurgens. October 20, 2015, Edward A. Murphy for Jurgens, Jenny Jourdannais, Bernard R Given and Robyn Frohlin for Victor Properties

2015 Mont. B.R. 469

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McCulley v. U.S. Bank, Montana Supreme Court, Fraud

Case no DA 14-0267

McCulley entered into an agreement to purchase a condominium in Bozeman. On May 25, 2006, McCulley approached Heritage Bank, later purchased by U.S. Bank, and applied for a 30-year residential loan for $300,000. Jeff Mortensen, Heritage Bank General Manager, took McCulley’s application over the phone. The following day, Mortensen emailed an internal credit memorandum to Heritage Bank Senior Vice-President, Steve Feurt , favorably analyzing McCulley’s credit, but noting that, while the condominium was "residential," the lot upon which it was built was zoned "commercial B-2." The memorandum indicated that the commercial zoning precluded the use of "standard secondary market sources for financing a residential condominium." As a result, Mortensen suggested to Feurt, and Feurt approved, an 18-month, $300,000 commercial loan in lieu of the loan McCulley had requested, stating in an email: "Might be the only business we get from her. With the risk might as well make it worth our while." The Bank recognized McCulley could not pay back the $300,000 loan in 18 months due to McCulley’s low income relative to the loan amount. The Bank further understood it would be very difficult for McCulley to find refinancing at the end of the 18 months because of the way in which the property was zoned. McCulley was not privy to the internal memo and was unaware of the significance of the commercial zoning. The Bank did not advise McCulley that it was changing the terms of the loan she had applied for to an 18-month commercial interest loan.

On May 30, 2006, the Bank sent McCulley a disclosure statement pursuant to the Truth-In-Lending Act (TILA)1 regarding her loan application. The TILA disclosure statement reflected a 30-year adjustable interest rate loan for only $200,000. Upon receiving the TILA disclosure, McCulley contacted Mortensen and requested that the loan amount be raised to $300,000, as she had originally requested. Mortensen agreed to raise the amount to $300,000 after McCulley offered additional collateral. The Bank generated a Good Faith Estimate that referenced a 30-year payment plan for the proposed loan.2 The Bank did not provide a written document to McCulley explaining that the term of the loan it was approving would be changed to 18 months. McCulley proceeded with the understanding that her loan would be for the 30-year term she had applied for, as reflected on the TILA disclosure statement and the Good Faith Estimate.

On June 16, 2006, the loan closing was held at a title company. Mortensen was present. McCulley was presented with a stack of documents bound by a metallic clip and directed to sign where "sign here" sticky notes had been placed on the documents. An explanation of the individual documents was not provided to McCulley. Included in the stack of documents were three loan applications disclosing three different and inconsistent loans to McCulley, as follows:

Loan Application 1: Amount: $300,000; Term: 18 months; Rate: 8.75%

Loan Application 2: Amount: $200,000; Term: 12 months; Rate: 8.75%

Loan Application 3: Amount: $200,000; Term: 30 years; Rate: 7.75%

The Bank also provided a disclosure form for McCulley’s signature captioned: "NON ASSUMABLE FIXED RATE LOAN DISCLOSURE." The disclosure form described the term of McCulley’s loan as 30 years with an interest rate of 7.75%. However, a loan application form for a 30-year, $300,000 loan, as requested by McCulley and promised by the Bank, was not provided. McCulley signed all of the documents, including the three varying and inapposite loan applications, and the disclosure form, in reliance on the Bank’s previous representations that the loan was for a term of 30 years.

In late 2007, U.S. Bank sent a notice to McCulley advising her that the balloon payment on her 18-month loan would be due in December. For the first time McCulley understood she did not have the 30-year residential mortgage for which she had applied. McCulley contacted U.S. Bank, which initially agreed to convert the loan into a 30-year term loan if McCulley made a principal reduction payment in the amount of $100,000. However, following McCulley’s assent to do so, the Bank notified McCulley in writing that it would instead require a principal reduction of $200,000, and not the $100,000 previously agreed upon, to convert the loan.McCulley persisted in attempting to convince U.S. Bank to restructure the loan, but the Bank refused. McCulley was unable to locate long-term residential financing and the Bank placed the loan into foreclosure. McCulley sold her home to a buyer one week before the scheduled foreclosure sale for approximately $40,000 less than the loan balance. U.S. Bank’s refusal to restructure the loan and the following foreclosure process created significant emotional distress for McCulley. Though previously physically and mentally healthy, McCulley began suffering from depression, which culminated in a near-fatal suicide attempt.

After remand, the jury found in favor of McCulley, awarding $1,000,000 in compensatory damages and $5,000,000 in punitive damages. Pursuant to § 27-1-221(7)(c), MCA, the District Court reviewed the punitive damages award and issued an order confirming it. The District Court also ordered post-judgment interest to accrue from the date of the court’s decision confirming the award.

The Bank contends McCulley failed to present sufficient evidence to demonstrate actual fraud. A party asserting a claim of actual fraud must establish the following elements: (1) a representation; (2) falsity of the representation; (3) materiality of the representation; (4) speaker’s knowledge of the falsity of the representation or ignorance of its truth; (5) speaker’s intent that it be relied upon; (6) the hearer’s ignorance of the falsity of the representation; (7) the hearer’s reliance on the representation; (8) the hearer’s right to rely on the representation; and (9) the hearer’s consequent and proximate injury caused by the reliance on the representation.

We conclude McCulley presented sufficient evidence for the jury to find U.S. Bank committed actual fraud. While the Bank largely seeks to relitigate the case on appeal, the evidence presented at trial was sufficient for the jury to find that McCulley was given a deceptive offer by the Bank in response to her loan inquiry, and, having obtained her audience, the Bank secretly switched the terms of the loan to the Bank’s benefit and McCulley’s detriment. McCulley testified that the Bank falsely represented she would be given a 30-year, residential mortgage loan. McCulley’s testimony was corroborated by both the TILA statement and the Good Faith Estimate indicating her loan would be for a 30-year term consistent with her initial loan application, not an 18-month loan. The Bank failed to disclose that it was offering only a bridge loan. The Bank added to its deception by presenting three separate and inconsistent loan applications for McCulley’s signature at closing; an additional disclosure form on the day of closing, which stated terms consistent with the loan for which she had applied; and, in contrast to standard banking practice, the Bank failed to provide McCulley documentation reflecting the Bank’s change of the terms of the loan. The Bank’s internal communications and other circumstantial evidence demonstrate the Bank knew at the time it sent the falsely stated documents to McCulley that, to the contrary, she would not receive a 30-year, residential loan. The evidence also established the Bank knew she could not repay the 18-month loan that it supplied in place of the loan McCulley requested. Lastly, McCulley presented evidence that she lacked knowledge of the falsity of the Bank’s representations when the fraudulent conduct occurred and thus she had the right to rely on the representations. Although we cannot know what evidence the jury found persuasive, we can conclude there was sufficient evidence for the jury to have reached its verdict. Therefore, we hold that McCulley presented evidence sufficient to demonstrate the Bank committed actual fraud.

In determining whether a punitive damages award is grossly excessive under the Due Process Clause, a court must consider three "guideposts" announced in Gore: (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity, or ratio, between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages In determining whether a punitive damages award is grossly excessive under the Due Process Clause, a court must consider three "guideposts" announced in Gore: (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity, or ratio, between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

This was not merely a case of a bank failing to apprise an unsophisticated buyer of the associated risks in purchasing her home; nor of a bank mistakenly and unintentionally changing the terms of the loan due to clerical errors. Here, the District Court found, in accordance with the jury’s verdict, that the Bank intentionally tricked McCulley by changing the loan from one that her finances could support to one that it knew her finances could not support. And when the situation played out as the Bank predicted, it initiated foreclosure on McCulley’s home. We conclude that U.S. Bank’s "bait-and-switch" tactics counsel in favor of the award. In sum, the five factors given by the U.S. Supreme Court to evaluate the most important guidepost, reprehensibility of the defendant’s conduct, weigh in favor of affirming the punitive damages award.

McCulley v. U.S. Bank, April 14, 2014, James A. Patten and Patricia Peterman for McCulley, F. Matthew Ralph and Ben D. Kappelman for U.S. Bank of Montana

2015 Mont.B.R. 123

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Myrstol-Snyder,  Chapter 12, Eligibility

Case no. 15-60189

Debtor filed a voluntary chapter 12 petition on March 19, 2015, asserting she was a "family farmer" entitled to proceed under that chapter. Debtor listed no equipment or machinery used in a business, no farming equipment or implements, no farm supplies or feed, and no livestock. On Schedule I, Debtor discloses that she is an EMT and is employed by the Roundup School District as a substitute teacher; Debtor’s spouse, Craig Myrstol ("Craig"), is employed by a drilling company. Debtor testified that while the Property is not suitable for growing crops, and Debtor has never raised any type of crop for profit or sale, Debtor has raised horses and other animals on the Property. Debtor testified that she has received $1,000.00 from the sale of horses during the past five years. Debtor also raises chickens and sells the eggs. Debtor uses the proceeds from the sale of eggs to buy chicken feed. Debtor has never reported any income from the sale of horses or eggs on her income tax returns. Debtor’s children also have cow and a steer that they are raising as 4-H projects. Debtor testified that she and her family own three pigs, two of which they will slaughter and eat. Debtor grows a garden and cans what she harvests from her garden for consumption by her family.

Chapter 12 was designed to give "family farmers" an opportunity to reorganize under a special chapter of the Code, free from many of the provisions of chapter 11 that could hamper such a reorganization. Under 11 U.S.C. § 109(f), only a "family farmer or family fisherman" with regular annual income may be a debtor under chapter 12. Section 101(19) provides: "The term ‘family farmer with regular annual income’ means family farmer whose annual income is sufficiently stable and regular to enable such family farmer to make payments under a plan under chapter 12 of this title." In turn, "family farmer" is defined by the Code to mean:

...individual or individual and spouse engaged in a farming operation whose aggregate debts do not exceed $3,792,650 and not less than 50 percent of whose aggregate noncontingent, liquidated debts (excluding a debt for the principal residence of such individual or such individual and spouse unless such debt arises out of a farming operation), on the date the case is filed, arise out of a farming operation owned or operated by such individual or such individual and spouse, and such individual or such individual and spouse receive from such farming operation more than 50 percent of such individual's or such individual and spouse's gross income for—

(I) the taxable year preceding; or

(ii) each of the 2d and 3d taxable years preceding the taxable year in which the case concerning such individual or such individual and spouse was filed[.]

Engaging in a farming operation at the time of filing is not alone sufficient. Congress required, in § 101(18)(A), that a chapter 12 debtor establish gross income from farming operations constituted more than 50% of total gross income in one of two relevant periods—either the taxable year preceding the year of filing, or the 2nd and 3rd taxable years preceding the year of filing. Debtor’s efforts produce neither crops nor commercial livestock, for sale or otherwise, now or in the foreseeable future. Moreover, Debtor has not reported any gross income from farming operations in either the taxable year preceding the year of filing or the 2nd and 3rd taxable years preceding the year of her bankruptcy. In short, Debtor does not satisfy the 50% farm income requirement of § 101(18)(A)(I). Lack of statutory eligibility is "cause" for dismissal of the case.

In re Myrstol-Snyder, May 18, 2015, Joseph V. Womack, Trustee, Rachel Calire Snyder-Myrstol, Pro-se, Todd Gunderson and Martha Sheehy for Wacker.

2015 Mont.B.R. 231

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Nichols, Chapter 7, Exemptions, Annuity Contracts

Case no. 14-60974

Pending the Trustee’s Objection (Document No. 26) to Debtors’ claim of exemption in six (6) annuity contracts. John inherited six annuity contracts from his mother, payable by Ameriprise Financial. John testified that one of the annuity contracts has lapsed, Ex. B3, leaving five annuity contracts which pay John a monthly total of $1,203.64, after the withholding of taxes. John testified that, of the five remaining annuity contracts, one has a payment that will continue only for his lifetime, after which it will lapse, and the three other contracts expire in January of 2016.

Section 31-2-106 allows an individual in bankruptcy to exempt from execution of judgment that property identified in § 33-15-514. As this Court noted in Prevost, §33-15-514 "is specifically listed among the statutes based upon which an individual may exempt property from the estate in a bankruptcy proceeding at MCA § 31-2-106(1)." The Debtors have the rights, pursuant to § 31-2-106(1), to exempt the annuities as provided under § 33-15-514 as they may exempt the annuities from execution by a judgment creditor. The fact that the Trustee seeks to administer the annuities as property of the estate requires no different analysis than it would with respect to Debtors’ homestead exemption or their vehicle and personal property exemptions claimed under Title 25, MCA, all of which also are property of the estate subject to exemption.

The Trustee’s argument that John’s exemption in the annuity contracts is limited to $250 a month ignores the safe-harbor provision this Court found in § 33-15-514(1)(b) in Prevost, which protects the monthly payment up to $350, with only those payments exceeding $350 per month subject to a garnishee’s execution pursuant to § 33-15-514(1)(c). The Court sees no reason to depart from its Prevost analysis finding a safe-harbor provision up to $350 a month.

After consideration of the evidence in the record, this Court finds and concludes that the reasonable requirements of John and his spouse compel the Court to exercise its discretion by exempting all of the annuity payments above $350 per month under § 33-15-514(1)(c). Debtors’ Schedules I and J show that, after expiration of one annuity contract, their expenses on the petition date exceed their income even with the income from the five remaining annuity contracts. The Debtors’ financial prospects are bleak. Even with all of the income from the five remaining annuity contracts, the evidence suggests that their monthly expenses exceed their income. Payments under three of the annuity contracts will cease in February 2016, and payments under a fourth will cease in September 2017. If the Court were to disallow or reduce John’s claim of exemptions in the five remaining annuity contracts, the evidence shows that the result would be a hardship to the Debtors which would not be, in the Court’s view, just and proper compared with the limited distribution to creditors from such a recovery.

In re Nichols, January 12, 2015, Christy L Brandon, Trustee, Nik G. Geranios for Nichols

2015 Mont. B.R. 9

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Northwest Pipe Fittings Inc., v.  Paddock, Chapter 7, Adversary Proceeding, Exception to Discharge, Fraud

Case no. 14-61077, Adversary no. 14-00042

Plaintiff Northwest Pipe Fittings, Inc. seeks exception of its claim from the Defendant/Debtor Joseph Allen Paddock’s discharge on grounds of fraud pursuant to 11 U.S.C. § 523(a)(2)(A). Paddock’s counterclaim seeks damages from Plaintiff based on § 525(b), alleging that Northwest personnel became hostile and created a hostile work environment. Section 525(b) prohibits a private employer from terminating the employment of or discriminating with respect to employment a debtor who is or has been a debtor in bankruptcy.

By failing to respond to Plaintiff’s RFAs, those matters are deemed admitted under Rule 7036(a)(3). Once admitted, the matter "is conclusively established unless the court on motion permits withdrawal or amendment of the admission" pursuant to Rule 36(b). Because of Paddock’s failure to file lists of witnesses and exhibits, the Court prohibited him from offering any testimony or exhibits in support of his counterclaim. The counterclaim therefore fails for lack of supporting evidence of termination of employment or discrimination.

Plaintiff’s complaint avers a claim to except from Defendant’s discharge the sum of $46,540.83 under § 523(a)(2)(A), plus costs and attorneys’ fees. Section 523(a)(2)(A) provides that, "a discharge under . . . this title does not discharge an individual debtor from any debt – (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by – (A) false pretenses, a false representation, or actual fraud, . . . ."

To establish a claim for an exception to discharge under this provision requires a creditor to demonstrate the existence of five distinct elements by a preponderance of the evidence: (1) the debtor made representations; (2) that at the time the debtor knew they were false; (3) that the debtor made them with the intention and purpose of deceiving the creditor; (4) that the creditor justifiably relied on such representations; and (5) that the creditor sustained the alleged loss and damage as the proximate result of the misrepresentations having been made.

Assuming that the first 4 elements of fraud are proven by the evidence, in order to prevail under § 523(a)(2)(A) Plaintiff still must establish that its claim sought to be discharged arose from an injury proximately resulting from its reliance on the representation made with the intent to deceive. Paddock’s failure to respond to RFA 4 results in his admission that Northwest delayed enforcement or collection activities as a result of his promise to pay. However, in order to prevail on a § 523(a)(2)(A) claim based on the creditor's forbearance, the creditor must prove, among other things, that at the time of the forbearance, "it had valuable collection remedies." Northwest failed to show any amount by which its remedies lost value during the forbearance period. The fifth element finds no support from Paddock’s failure to respond to Northwest’s RFAs. Narrowly construing exceptions to discharge under § 523, the Court finds and concludes that Plaintiff failed its burden under the fifth element to show that its claim sought to be discharged arose from an injury proximately resulting from its reliance on Paddock’s representations in 2014.

Northwest Pipe Fittings, Inc., v. Paddock, July 13, 2015, Eli J. Patten for Northwest Pipe Fittings, Joseph Paddock, Pro se

2015 Mont. B.R. 376

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Roybal v. Bank of America, United States District Court, Good Faith and Fair Dealing

Case no. CV-14-280-M-DLC

In February 2010, a BANA representative told Roybal, over the telephone, that he had been approved for a loan modification. Roybal was told to make three trial payments and then he would be approved for the modification. Roybal made the three trial payments, but never received written confirmation of the modification. Following the three trial payments, BANA did not approve the promised loan modification.

Breach of Contract

Roybal alleges that a BANA representative told him over the telephone that he would be approved for a loan modification if he successfully made three trial payments of $1540 each. He was also told that so long as he made the trial payments his loan would not be considered in default. Roybal made the three trial payments as required, but BANA never delivered on their oral promise to modify his loan. The modified terms were never reduced to writing. Roybal alleges breach of an oral agreement, but the Complaint makes clear that he was the only party who performed. As such, there was no executed oral agreement. Because the Complaint does not allege a breach of a valid contract, Roybal’s breach of contract claim must be dismissed.

Statute of Limitations

other than his breach of the covenant claim, Roybal’s tort claims are subject to, at most, a three-year statute of limitation period. Because Roybal filed his Complaint on November 5, 2014, his claims are subject to dismissal if (1) the claims accrued before November 5, 2011, and (2) it is beyond doubt that equitable tolling is inapplicable. Mont. Code Ann. § 27-2-102, -201, - 203; It is clear from the face of the Complaint that all of BANA’s alleged tortious behavior occurred on or before February 2011. Roybal paid the loan in full in February 2011, and he alleges no other relationship with BANA.

Roybal contends that his claims did not accrue until he received notice sometime in 2012 that BANA had applied his trial payments to his account. But accrual of a claim does not depend on a party’s awareness of all the facts relevant to a claim; it depends only on the facts’ existence or occurrence. While it may have been difficult for Roybal to understand why BANA was acting the way it did, and while it may have been unclear if BANA would ever formally grant a loan modification as it had promised to do, the facts constituting Roybal’s claims were not concealed or self-concealing. Roybal was privy to all of the facts constituting his claims while they were occurring

Breach of the Implied Covenant of Good Faith and Fair Dealing

Here, Roybal asserts that BANA "acted dishonestly while handling the foreclosure of his underlying mortgage" and that BANA’s "actions in 2010 and 2011 form the basis for a breach of good faith between the parties with respect to the underlying mortgage agreement and Roybal’s legitimate expectations." While these allegations are not pled with the utmost specificity in the Complaint, the Court agrees with Roybal that, reading the Complaint with the required liberality, he has alleged facts sufficient to infer that his claim for breach of the implied covenant is based at least in part on the underlying mortgage agreement. Thus, the claim is not inextricably linked to the unenforceable oral promise. Applying the eight year statute of limitations, the claim is timely pled and BANA’s motion to dismiss this claim is denied.

Roybal v. Bank of America, April 6, 2015, Shelly F. Frander for Roybal, Mark D. Etchart for Bank of America

2015 Mont. B.R. 212

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Sann, Chapter 11, Conversion, Dismissal

Case no. 14-61370

At issue is whether the "best interests of creditors and the estate" shown by the evidence warrants dismissal of this case, or conversion to Chapter 7 under § 1112(b). The UST asks for conversion of this case to Chapter 7 or, in the alternative, for appointment of a trustee if the case remains in chapter 11. At the hearing the UST argued that no receiver is appointed in the civil case, despite the preliminary injunction/asset freeze and, thus, currently no effort is being taken to recover unlawful transfers or determine who is the owner of properties. The UST further argues that Sann’s monthly draw of $17,844 for living expenses allowed under the preliminary injunction should cease upon appointment of a trustee, who also could take charge of the funds in Debtor’s attorneys’ trust accounts, which were transferred without court authorization. The UST argues that Debtor has failed to voluntarily comply with the reporting requirements and has taken no action to recover assets even though he is the sole owner of Sann, LLC. Jensen argued that the best interest of the creditors test does not mean the best interest of the Debtor, and that Sann’s guilty pleas to three felonies show that he is not credible.

Debtor’s attorney Schwartz agreed that cause exists under § 1112(b), but Debtor asks for dismissal rather than conversion. Based on the Debtor’s concession at the hearing, all parties agree that "cause" exists for dismissal or conversion under § 1112(b). Thus, the Court finds that "cause" exists under § 1112(b) and the Court need not discuss it at length. Debtor’s monthly draw of $17,844 for living expenses excepted from the asset freeze is a substantial and continuing loss or diminution of the estate. Debtor’s amended Schedule J puts his expenses, including a home mortgage, at only $6,565.21. Second, this Court finds Sann’s diversion of funds carved out of the asset freeze for payment of mortgages to pay his attorneys constitutes gross mismanagement of the estate. The diversion of funds by Debtor was without the required approval of the district court under the asset freeze and without the FTC’s written consent. Third, the evidence shows unexcused failures by the Debtor to satisfy the timely filing of MORs and the Form B26. Fourth, Debtor has not filed a disclosure statement or plan, and in conceding cause and requesting dismissal of the case, and his possible impending incarceration, it is clear that he will not file a disclosure statement or plan within the time fixed by the Code or by order of the court.

The loss of assets to foreclosure would harm the unsecured creditors if the case is dismissed. On the other hand, if the case is converted to Chapter 7 or a trustee is appointed in chapter 11, the automatic stay would remain in place and a trustee can be appointed to investigate the Debtor’s business affairs, marshall assets and negotiate and possibly cure the default which caused the properties to fall into foreclosure. While it certainly is possible that Sann ultimately will prevail against the FTC, it is in this Court’s view unlikely. Furthermore, the evidence of Sann’s conduct is that the unsecured creditors would wait a long time for payment if the case is dismissed. His imminent incarceration will last at least 24 months, after which when released he faces a prolonged period of litigation with the FTC. A trustee appointed in either chapter 7 or 11, by contrast, would start with a blank slate with creditors and the UST. A trustee could request relief from the asset freeze from the district court, could stop the $17,844 monthly draw from the Sann’s assets currently in place, could seek recovery of the transfers of money and property to Sann’s family members, entities, and attorneys from unauthorized diversions, could explore curing the default in mortgage payments to stop foreclosure proceedings and preserve estate property, could investigate the Debtor’s businesses and financial affairs and arrange for the preparation and filing of tax returns which the evidence shows Sann has failed to file. With respect to recovering transfers, keeping the case in bankruptcy rather than dismissing the case extends the lookback period for recovering property, as explained by the FTC’s joinder. Finally, a trustee could approach the FTC and the DOR and explore the possibilities of settlement in good faith, which Sann cannot do because of the state of his relations with these entities and the UST. In a chapter 7 case a trustee would eliminate all of those reorganizational administrative burdens and expenses and would be able to investigate the Debtor’s financial affairs, initiate proceedings to recover preferences and fraudulent transfers, negotiate with creditors, appear and seek appropriate relief from the district court, and administer assets. What limited authority a trustee may need to operate a business of the Debtor in chapter 7, the trustee can request from this Court under 11 U.S.C. § 721.

In re Sann, April 29, 2015, Neal G. Jensen for the United States Trustees Office, Samel A. Schwartz and James A. Patten for Sann, Michael P. Mora for Federal Trade Commission, Keith A. Jones and Amanda Myers for MDOR

2015 Mont. B.R. 154

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Schwarz v. Liechti, Chapter 7, Adversary Proceeding. Discharge, Fraud

Case no. 14-61228, Adversary no. 15-00004

Plaintiff pursues two claims for relief in this adversary proceeding. First, she seeks denial of Debtor’s discharge for knowingly and fraudulently making false oaths and account under § 727(a)(4)(A). Second, she seeks exception from Debtor’s discharge of her claim under § 523(a)(4) for fraud or defalcation while acting in a fiduciary capacity. We begin with her second claim for relief.

I. Count § 523(a)(4) Fraud or Defalcation While Acting in a Fiduciary Capacity.

No argument or evidence exists in the record to support a finding of an express trust. With respect to a technical trust, this Court has researched the provisions of MONTANA CODE ANNOTATED ("MCA") and Montana case law searching for the term "technical trust." Molly did not provide a citation to any Montana statute which defines "technical trust." The "Montana Trust Code" at MCA § 72-38-101 et seq. provides the definitions of kinds of "resulting trust" (§§ 72-38-120; 72-38-121; and 72-38-122). Section 72-38-123 defines "constructive trust." Like Nevada, Montana law does not define a "technical trust.

"If applicable nonbankruptcy law does not clearly and expressly impose trust-like obligations on a party, [courts] will not assume that such duties exist and will not find that there was a fiduciary relationship. "Montana statutes and case law and the evidence in the record do not "clearly and expressly" impose trust-like obligations on Liechti, and therefore this Court cannot find that there was a fiduciary relationship.

II. § 727(a)(4)(A) – False Oath or Account.

To prevail on this claim, a plaintiff must show, by a preponderance of the evidence, that: "(1) the debtor made a false oath in connection with the case; (2) the oath related to a material fact; (3) the oath was made knowingly; and (4) the oath was made fraudulently."

Liechti’s Form B22A and his Schedules and SOFA at Ex. A, B, C, and E all include declarations signed by Liechti under penalty of perjury that the information contained therein is true and correct. Ex. A, B, C, and E further provide that the Debtor read the Schedules and SOFA. Ex. FFF, which Liechti signed at the beginning of the § 341(a) meeting of creditors, repeats that he read his Schedules and SOFA and that all of the answers and information provided are true and correct. Each of these declarations are false oaths made by Liechti in connection with the case.

The second element that must be proven is that the oath related to a material fact. The omissions of AEWS, its income and account no. 772 from Debtor’s Form B22A, Schedules and SOFA, and Ex. FF, necessarily bear a relationship to the Debtor’s business transactions or estate, concern the discovery of assets and business dealings and detrimentally affect administration of the estate.

The third element required by § 727(a)(4)(A) is that the debtor act knowingly in making the false oath. The evidence shows that Liechti acted deliberately and consciously in omitting AEWS, its income and account no. 7772 from his Schedules and SOFA. While carelessness and recklessness are lower standards than "knowing," this Court observed in Wright that "[a] reckless disregard of both the serious nature of the information sought and the necessary attention to detail and accuracy in answering may rise to the level of fraudulent intent necessary to bar a discharge."

The fourth and final element required of a plaintiff under § 727(a)(4)(A) is to show that the false oaths were made fraudulently. Plaintiff bears the burden of showing that the debtor made a false statement or omission in bankruptcy schedules, "(2) at the time he knew they were false; [and] (3) . . . he made them with the intention and purpose of deceiving the creditors." Coupled with the other circumstantial evidence of fraudulent intent discussed above, this Court finds and concludes that Plaintiff satisfied her burden of showing that Liechti made omissions in this Schedules and SOFA, at a time he knew they were false and with the intention and purpose of deceiving the creditors in order that he could continue to enjoy the use of the undisclosed income stream and bank account.

Schwarz v. Liechti, December 16, 2015, James A. Patten for Schwarz, Harold V. Dye for Liechti

2015 Mont. B.R. 600

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Serrania v LPH Inc., Montana Supreme Court, Justiciable Issue, FDCPA

Case no. DA 14-0085

In 2009, Serrania went to DDG with a toothache. She signed a contract before receiving treatment. The contract states, "Payment of all treatment and services rendered are my responsibility and I agree to pay collection and legal fees if any delinquent balance is placed with an agency or attorney for collection of suit."  DDG referred Serrania’s account to LPH, a debt collection agency. DDG informed LPH that Serrania owed $1,112.13. The debt comprised costs for treatment rendered to Serrania, her then-husband, and her son, along with interest on unpaid amounts, and a fee for a bad check.

Serrania sued LPH and DDG, alleging that LPH violated the Fair Debt Collection Practices Act (FDCPA), that DDG committed credit defamation, and that both violated the Montana Consumer Protection Act. Serrania sought to recover approximately $650,000 in damages. LPH and DDG counterclaimed for breach of contract and unjust enrichment. The Court held a pretrial conference. Wallace, Serrania’s attorney, failed to attend the conference. On LPH and DDG’s motion, the Court ordered Wallace to pay $1,000 in sanctions each to counsel for LPH and DDG for the unwarned absence. The Court also entered summary judgment against Serrania on the contract and FDCPA claims. The court sanctioned Serrania and Wallace in the amount of $42,113.32 to be paid to LPH, and $32,647.94 to be paid to DDG.

Serrania underwent bankruptcy after the District Court issued judgment. Her debts resulting from the dental bill and the District Court’s orders were discharged.

1. Whether Serrania’s appeal is justiciable. LPH argues that a change in circumstances has mooted Serrania’s appeal. Specifically, the United States Bankruptcy Court discharged the District Court’s judgments against Serrania. Thus, the sanctions and contract judgments no longer may be collected against Serrania. Because this Court cannot grant effective relief to Serrania with respect to appeals on those issues, those appeals are moot. By contrast, it appears that the bankruptcy trustee abandoned Serrania’s FDCPA claim against LPH. Serrania possesses that claim and stands to benefit if this Court were to reverse the District Court on it. Serrania’s appeal of the Court’s summary judgment order on her FDCPA claim is live, and we will examine its merits.

2. Whether the District Court correctly awarded LPH summary judgment on the FDCPA claim.  The FDCPA prohibits a debt collector from collecting a debt through "any false, deceptive, or misleading representation or means", or through "unfair or unconscionable means," While there is logic behind requiring a party to attempt to resolve a debt dispute outside of court before filing suit, the FDCPA simply does not impose that requirement. And such a requirement undermines the FDCPA’s purposes. Therefore, we conclude that the Court relied on incorrect reasoning in granting summary judgment to LPH on the FDCPA claim. Nonetheless, we uphold court orders that reach the correct result. In this case, one alternative ground that would entitle LPH to summary judgment on the FDCPA claim would be if LPH did not in fact attempt to collect a debt from Serrania through "any false, deceptive, or misleading representation or means," or through any "unfair or unconscionable means,"

Serrania disputes the validity of billing her for treatment provided to her child and then-husband.  Section 40-2-210, MCA, further specifies that necessities include services that are "reasonably required to provide for the health . . . of the married person, the person’s spouse, and minor children . . . ." These provisions make a person liable for the medical expenses of her spouse and child. Accordingly, these provisions permitted LPH to represent Serrania’s debt as encompassing expenses related to dental services provided to her husband and child.

Serrania also disputes the validity of adding interest to her debt. Section 31-1-106(1)(b), MCA, however, authorizes interest "on all money at a rate of 10% a year after it becomes due on . . . an account stated[.]" Serrania had accounts with DDG, and DDG charged interest on those accounts when they were ninety days past due, in compliance with § 31-1-106, MCA. LPH did not misrepresent Serrania’s debt by including interest in the represented debt amount.

Finally, Serrania disputes the validity of a non-sufficient funds fee that was added to her debt after she passed a bad check. But this fee is authorized by § 27-1-717(1)(a), MCA, which states, "A person who issues a check . . . for the payment of money is liable for a service charge . . . or for damages . . . if the check . . . is . . . dishonored for lack of funds . . . ." LPH did not misrepresent Serrania’s debt by including this fee in the represented debt amount.

The District Court also ordered Wallace individually to pay $10,000 to the Missoula County Clerk of Court’s Office for his "blatant lack of candor and his disrespectful conduct toward the Court and the legal process and his egregious abuses of the legal rights of the Defendants." Wallace has not demonstrated clear error in the court’s findings in this regard. We cannot affirm the District Court’s order for Serrania and Wallace jointly to pay $24,797.24 to DDG and $41,113.32 to LPH. The District Court based these sanctions in part on the "filing of this frivolous law suit in the first place." But, given this Court’s implicit conclusion earlier in this opinion that Serrania’s FDCPA claim had some grounding in the law—albeit not enough to withstand summary judgment—this suit does not appear entirely frivolous.

Serrania v. LPH INC. dba Northwest Colllectors, April 28, 2015, Terry A Wallace for Serrania, David J Steele for LPH.

2015 Mont. B.R. 195

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Stevens, Chapter 7, Attorney Disqualification

Case no. 14-60114

At issue is whether Cotner is disqualified from employment by the Trustee as a result of Cotner’s representation of the Creditors in their state court lawsuit against the Stevens at the same time he seeks to be employed to represent the estate or due to a conflict of interest resulting from the alleged representation by Cotner’s partner in DML, William VanCanagan, of Tom and his parents in a past transfer of a liquor license and formation of a casino business.

Section 327(a) provides:

(a) Except as otherwise provided in this section, the trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee’s duties under this title.

Tevis explains that § 327(a) requires a two-pronged test for approval of employment of professional persons: (1) they cannot hold or represent an interest adverse to the estate; and (2) they are disinterested persons. The BAP in Fondiller interpreted the phrase "hold or represent an interest adverse to the estate" to mean that "the attorney must not represent an adverse interest relating to the services which are to be performed by that attorney." To hold an adverse interest means: to possess or assert any economic interest that would tend to lessen the value of the estate or that would either create an actual or potential dispute in which the estate is a rival claimant; or to possess a predisposition under circumstances that render such a bias against the estate. To represent an adverse interest means to serve as an attorney for an entity holding such an adverse interest.

The term "disinterested person" is defined at 11 U.S.C. § 101(14) as follows:

(14) The term "disinterested person" means a person that –

(A) is not a creditor, an equity security holder, or an insider;

(B) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and

(C) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason . . . .

Cotner and DML are not creditors or insiders of the Debtor under § 101(31)(A). For the purposes of disinterestedness, "a lawyer has an interest materially adverse to the interest of the estate if the lawyer either holds or represents such an interest."  In the instant case no objection to Cotner’s employment has been filed by another creditor or the U.S. Trustee. The Stevens do not have an allowed claim in this bankruptcy case so they are not a "creditor" as defined at § 101(10) and, thus, their objection does not trigger § 327(c). If the Stevens were creditors, they would have to show that an actual conflict of interest exists in order to disapprove Cotner’s employment. Cotner is not disqualified for employment under § 327(c) based on his employment by the Creditors, and he may be employed under § 327(e) notwithstanding the alleged representation of the Debtor because his employment by the estate in the avoidance action against the Stevens is in the best interests of the estate and Cotner does not represent or hold any interest adverse to the debtor or the estate with respect to the avoidance action.

Rule 1.20 provides for an attorney’s duties to prospective clients. Rule 1.20(a) provides that a "person who consults with or has had consultations with a lawyer about the possibility of forming a client-lawyer relationship with respect to a matter is a prospective client." The evidence does not show that the Stevens and Tom consulted with VanCanagan about the possibility of forming a client-lawyer relationship. It shows that they met with VanCanagan as part of the negotiations and transaction with VanCanagan’s clients McDonald and K-Mac, to transfer his liquor license and form Lemonade, LLC, and the Gaming Garage. The Court finds that the Stevens and Tom were never prospective clients. Rule 1.20(b) provides: "Even when no client-lawyer relationship ensues, a lawyer who has had consultations with a prospective client shall not use or reveal information learned in the consultation(s), . . . ." Again, Tom and the Stevens were not prospective clients because they did not have consultations with VanCanagan about the possibility of forming a client-lawyer relationship. Their consultations with VanCanagan occurred while he was representing his clients: McDonald and K-Mac.

In re Stevens, June 1, 2015, Harold V. Dye for George and Gert Stevens, Trent N. Baker for Creditors, Jon M. Binney for Thomas Stevens

2015 Mont. B.R. 241

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Stokes v. Duncan & Glover, Summary Judgment, Montana Supreme Court, Chapter 7 Cause of Action

Case no. DA 14-0483, District Court no. CDV - 2012-156

John Stokes appeals from the District Court’s order of July 23, 2014 granting summary judgment to Greg Duncan and Kathleen Glover. In March 2009 Duncan filed a Chapter 11 bankruptcy petition on Stokes’ behalf in the Bankruptcy Court. After a meeting of creditors, Duncan moved to withdraw as Stokes’ attorney in the bankruptcy because of disagreements with Stokes over who was responsible for Stokes’ incomplete disclosure of assets. The Bankruptcy Court granted Duncan’s motion to withdraw and Stokes proceeded with the bankruptcy proceeding. In September 2009 the Bankruptcy Court granted the

motion of the United States Bankruptcy Trustee, converting Stokes’ proceeding from a Chapter 11 to Chapter 7 bankruptcy and appointing a Trustee. Stokes filed the complaint in the present action in Montana District Court against Duncan and his paralegal Kathleen Glover. Stokes sought damages for legal malpractice, breach of contract and breach of fiduciary duty. The complaint alleges that Duncan failed to advise Stokes that the defamation judgment would not be discharged by filing bankruptcy, and that he would lose control over the appeal of that case. The bankruptcy Trustee moved to intervene in this action as the real party in interest. The Trustee sold the bankruptcy estate’s interest in the malpractice action to Duncan. Given the "broad scope" of Federal bankruptcy law in 11 USC § 541, the Bankruptcy Court concluded that Stokes’ claims against Duncan and Glover in State court were property of the bankruptcy estate that had been purchased by Duncan.

Stokes’ complaint against Duncan and Glover alleges that Stokes was damaged by Duncan’s erroneous advice concerning the effects of filing a petition in bankruptcy. While Stokes contends that his claims did not accrue because he was not damaged until later in his bankruptcy proceeding, "it is not necessary to know immediately the type and extent" of injury, and "[a]ll that is needed is a specific and concrete risk of harm to the party’s interest." Stokes argues on appeal that his legal injury or damage did not occur until his petition was converted from Chapter 11 to Chapter 7 because of Duncan’s negligence. But this is inconsistent with the allegations of his complaint. In part, the complaint alleged that Duncan negligently failed to advise Stokes "that filing for bankruptcy could never be successful in discharging the Defamation Judgment and that the bankruptcy petition could never accomplish the results Stokes sought by filing the bankruptcy." The complaint also alleged that Duncan either knew or should have known that, "upon filing of the bankruptcy petition, the appeal of the Defamation Judgment would be within the control of the bankruptcy trustee and that Stokes would require the bankruptcy court’s permission to continue pursuit of any appeal." Even if his post-petition damages continued to mount due to separate acts of negligence post-petition, Stokes alleged claims that are sufficient on their face to demonstrate that he was damaged and could have brought an action against Duncan at the time the petition was filed.

Stokes v. Duncan & Glover, March 24, 2015, Edward A. Murphy for Stokes, Michael F McMahon and Denny K. Plamer for Duncan & Glover.

2015 Mont. B.R. 114

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United States Trustee v. Franz,  Chapter 7, Adversary Proceeding, Revocation of Discharge

Case no. 10-61754, Adversary no. 15-00003

In this adversary proceeding seeking to revoke the Defendant/Debtor’s discharge pursuant to 11 U.S.C. § 727(d)(2), the Plaintiff United States Trustee filed a motion for summary judgment, together with a Statement of Uncontroverted Facts and supporting memorandum. In addition to Franz’s tardy response, he did not file in his response a "Statement of Genuine Issues" setting forth specific facts which he asserts establish a genuine issue of material fact precluding summary judgment as required by LBR 7056-1(a)(2). Debtor’s response includes a list of twenty numbered "Background Facts" in which he admits that he "had taken draws out against his beneficial interest in the estate." Rather than setting forth specific facts which he asserts preclude summary judgment in favor of the UST, Franz’s response blames his divorce, his attorneys, his creditors, the Trustee, the UST, the probate court, and his neighbors for the problems with this case. But as far as the 66 numbered uncontroverted facts contained in the UST’s SOUF, Franz’s response does not state specific facts which establish a genuine issue of material fact as to any of them. Therefore, the Court deems all material facts in the UST’s SOUF to be admitted based upon Franz’s failure to controvert them by a Statement of Genuine Issues.

Section 727(d)(2) provides in pertinent part that a court "shall revoke a discharge granted under subsection (a) of this section if – . . . (2) the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee . . . ." Under § 727(d)(2), the UST must prove (1) that Debtor acquired property of the bankruptcy estate and (2) that he knowingly and fraudulently failed to report or deliver such property to Trustee.

Turning to the "fraudulently" part of "knowingly and fraudulently," the same phrase is found under 727(a)(4), under which a discharge may be denied if a plaintiff shows that the debtor "knowingly and fraudulently" made a false oath. In denial of discharge actions, a "debtor's fraudulent intent may be established by circumstantial evidence or by inferences drawn from his or her course of conduct." While the SOUF includes a substantial amount of evidence from which this Court might make an inference of fraudulent intent based upon "badges of fraud," in a close call this Court concludes that the specific facts of Franz’s denials and explanation, viewed along with the undisputed background or contextual facts, are such that a rational or reasonable jury might return a verdict in Defendants’ favor based on that evidence. If a rational trier of fact might resolve disputes raised during summary judgment proceedings in favor of the nonmoving party, summary judgment must be denied.

United States Trustee v. Franz, June 24, 2015, Neal G. Jensen for United States Trustee, Randall A Franz, Pro se.

2015 Mont. B.R. 330

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United States Trustee v. Franz, Chapter 7, Revocation of Discharge

Case no. 10-61754, Adversary no. 15-00003

The UST’s complaint seeks revocation of Franz’s discharge under § 727(d)(2). Section 727(d)(2) provides in pertinent part that a court "shall revoke a discharge granted under subsection (a) of this section if – . . . (2) the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee . . . ." Under § 727(d)(2), the UST must prove both (1) that Debtor acquired property of the bankruptcy estate and (2) that he knowingly and fraudulently failed to report or deliver such property to Trustee.

Ex. 45, provides extensive evidence and detail proving by a great preponderance of the evidence that Franz knowingly failed, despite being told by his attorney and numerous times by the Trustee Samson, to keep Samson informed about the sale of the Marcus Place Apartments, of which one-third of the net proceeds were property of the estate, and that Franz knowingly failed to report the acquisition of or entitlement to such property, or to deliver such property to the Trustee. The case was converted to a case under chapter 7 on January 17, 2013. The evidence shows that the sale of the Marcus Place Apartments closed in June or July of 2013. No serious dispute exists that Franz acquired that property of the bankruptcy estate or that he knowingly failed to report or deliver such property to the Trustee. Those elements of § 727(d)(2) are proven by a preponderance of the evidence.

The Trustee has specific statutory duties under 11 U.S.C. § 704(a) to collect and reduce to money the property of the estate for which the trustee serves. The Debtor has a specific statutory duty under 11 U.S.C. § 521(a)(4) to "surrender to the trustee all property of the estate" and any information relating to property of the estate. By taking the $130,000 one-third inheritance share of the sale of the Marcus Place Apartments and spending it on himself and family members, Franz failed to perform his duty under § 521(a)(4) and hindered the Trustee in his performance of his duty.

Turning to the "fraudulently" part of "knowingly and fraudulently," the same phrase is found under 727(a)(4), under which a discharge may be denied if a plaintiff shows that the debtor "knowingly and fraudulently" made a false oath. The Ninth Circuit wrote, In re Retz, that a debtor in bankruptcy proceedings has a "duty to share full information with the Trustee. The Retz panel also noted that certain "badges of fraud" may support a finding of fraudulent intent under § 727(a)(2). These "badges of fraud," not all of which need be present, include: (1) a close relationship between the transferor and the transferee; (2) that the transfer was in anticipation of a pending suit; (3) that the transferor Debtor was insolvent or in poor financial condition at the time; (4) that all or substantially all of the Debtor's property was transferred; (5) that the transfer so completely depleted the Debtor's assets that the creditor has been hindered or delayed in recovering any part of the judgment; and (6) that the Debtor received inadequate consideration for the transfer. In this Court’s view the same "badges of fraud" may be applied in making a determination of fraudulent intent under § 727(d)(2). Based on the evidence set forth in detail in the facts section above, this Court finds and concludes that sufficient evidence exists of all six "badges of fraud" sufficient to overcome the liberal construction of § 727(d)(2) in favor of the debtor and strictly against those objecting to discharge.

United States Trustee v. Franz, November 5, 2015, Neal Jensen and James Perkins for the United States Trustee, Randall Franz, Pro-se

2015 Mont. B.R. 500

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Weik, Chapter 13, Dismissal with Prejudice

Case no. 14-61298

As far as MDOR’s priority claim for estimated taxes, in proposing a chapter 13 plan the Debtor has the burden of proving that his or her plan complies with the requirements for confirmation, including Section 1325(a)(3) which dictates that a plan must be "proposed in good faith and not by any means forbidden by law." It is not, in this Court’s view, in the public interest to allow debtors who fail to undertake their burdens under the Internal Revenue Code or corresponding state revenue laws to enjoy the benefits of the United States Bankruptcy Code. Debtor’s attempt to repay some obligations by means of a chapter 13 plan without having filed all required tax returns is contrary to § 1323(a)(5)’s requirement that the plan be proposed "not by any means prohibited by law." The evidence shows that the Debtor has not fulfilled the burdens of Chapter 13 relief by failing to file a Montana income tax return for tax year 2013, and therefore this Debtor is not entitled to the benefits of Chapter 13.

Turning to good faith, in determining whether a petition or plan is filed in good faith the court must review the "totality of the circumstances." In Leavitt, 171 F.3d at 1224, the Ninth Circuit held that in determining whether a chapter 13 plan was proposed in good faith a bankruptcy court should consider (1) whether the debtor misrepresented facts in his or her petition or plan, unfairly manipulated the Code, or otherwise filed his or her petition or plan in an inequitable manner; (2) the debtor's history of filings and dismissals; (3) whether the debtor intended to defeat state court litigation; and (4) whether egregious behavior is present.

Debtor’s Plan makes no provision for Midway’s claim, and Midway was not served with the notice of commencement of the case. These factors indicate that Weik unfairly manipulated the Code in his Plan. The first Leavitt factor reflects a lack of good faith. The evidence does not show that Weik ever received a discharge in his prior bankruptcy cases and his prior chapter 13 cases all were dismissed, including for his default in payments due under a confirmed plan. The second Leavitt factor clearly reflects a lack of good faith from the history of Weik’s bankruptcy filings. Spaeth testified that Midway was pursuing foreclosure against Weik’s property located in Midway’s storage units, pursuant to Arizona law. While this factor is not as clear cut as the first two Leavitt factors discussed above, on balance the Court concludes that Weik intended to defeat state court litigation when he filed the petition in the instant case to stay the foreclosure sale scheduled by Midway. The third Leavitt factor reflects a lack of good faith. Weik testified that he is entitled to pick and choose what to include in his Schedules. He is wrong. The evidence does not show that Weik received a discharge of personal liability to Midway and Midway retains its rights to his personal property under Arizona law. Weik’s repeated bankruptcy filings on the date of auction sale to stay Midway from satisfying its claim, followed by Weik’s failure to list Midway in his Schedules, is in this Court’s view egregious conduct. Additional egregious conduct is shown by the evidence that Weik failed to list his car, truck, and ownership of a corporation in his Schedules. This Court finds and concludes that the evidence in this case reflects extreme circumstances which justify the drastic sanction of dismissal with prejudice with a two-year prohibition against refiling.

In re Weik, February 24, 2015, Robert Drummond, Trustee, David Weik, Pro se.

2015 Mont. B.R. 82

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Whitefish Credit Union v. Prindiville, Montana Supreme Court, Mortgage Foreclosure, Deficiency

Whitefish Credit Union (WCU) appeals from the Eleventh Judicial District Court, challenging the District Court’s determination that a hearing was required to determine the fair market value of a foreclosed property, as well as the District Court’s valuation of the property and denial of a deficiency judgment.

Section 71-1-222(2), MCA, provides for entry of a deficiency judgment against the debtor after a foreclosure and sheriff’s sale, stating: "If it appears from the sheriff’s return that the proceeds are insufficient and a balance still remains due, judgment can then be docketed for the balance against the defendant or defendants personally liable for the debt . . . ." Although the statute does not contemplate a hearing, our cases have addressed this issue and provided additional guidance to the process of entering a deficiency judgment in a foreclosure proceeding.

WCU correctly argues that a hearing to determine the fair market value of the property is not mandated by statute, or by case precedent. A hearing is not a legal right of a debtor and, to the extent the District Court concluded that a hearing was required as a matter of law, this was incorrect. As Galleria I and Hamilton make clear, the specific facts of a case will determine if a court is moved "in the exercise of" equity jurisdiction to hold such a hearing.

The District Court had discretion to act in equity and we conclude that it did not abuse its discretion in proceeding to conduct a hearing. It noted the parties’ long-standing differences of opinion about the value of the Patrick Creek property and WCU’s request for a deficiency judgment exceeding $700,000. The Defendants had noted that a 2011 appraisal obtained by WCU (the Barrie appraisal) on 516 of the total 634 acres of the Patrick Creek property appraised the value to be $2,500,000, and that this figure had been assumed by WCU in certain of its internal lending documents. Thus, evidence in the record supports a decision to discretionarily act in equity and conduct a hearing.

WCU’s argument that a determination of fair market value is not required raises the question of the proper standard to be applied in this proceeding. Because the court is moved in equity, it is charged with "fashion[ing] an equitable result," which necessarily encompasses an equitable result for both parties. Just as the decision to conduct a hearing is a matter of equity, the determination of "fair market value" is an equitable task that is neither automatic nor mechanical, but subject to the factors we have mentioned.  "Fair value" and "fair market value" may not necessarily be any different, although the circumstances of a particular case may cause a court to conclude there is a distinction. If a district court determines to act in equity and conduct a hearing, it is to apply our above-stated standards in the process of endeavoring to "fashion an equitable result."

Whitefish Credit Union v. Prindiville, November 24, 2015, Sean S. Frampton for WCU, Judah M. Gersh and Kira I Evans for Prindville, Shinn and Rothschild

2015 Mont. B.R. 565

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Wirshing, Chapter 13, Post-confirmation Inheritance

Case no. 13-60990

The Chapter 13 Trustee filed his Motion to Modify, with an amended Plan attached which provides "Debtor, Gloria, shall turn over all of her inheritance as an additional payment under this Plan[.]" The Chapter 13 Trustee describes the only issue as whether his amended Plan, which is identical to the confirmed Plan except for the provision requiring turn over of all of the inheritance, satisfies the confirmation requirements of 11 U.S.C. §1325. Debtors admit that Ellen’s inheritance likely would be sufficient to pay 100% of allowed claims, but they argue that her inheritance will be received outside the 180-day time limit of 11U.S.C. § 541(a)(5), and they ask for clarification about how this Court interprets the interplay between § 541 and 11 U.S.C. § 306 when an inheritance is received more than 180 days after confirmation. Debtors argue that confirmation of their Plan had a binding effect under 11 U.S.C. §1327(a), and that their Plan does not provide for turnover of any inheritance.

Section 1327(a) provides: "The provision of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." This Court’s first observation is that § 1327(a) does not include the term "trustee" as a person bound by a confirmed plan. If Congress intended a chapter 13 trustee to be bound by confirmation under § 1327(a), it could have included "trustee" in that section. Section 1329(a) authorizes a trustee to request that a plan be modified after confirmation but before completion of payments. The same rule of statutory construction applies to the 180-day period in § 541(a)(5)(A), which includes as property of the estate any interest in property that the debtor acquires or becomes entitled to acquire within 180 days after the date of the filing of the petition "by bequest, devise, or inheritance." §541(a)(5)(A). Section 1306(a)(1) provides that property of the estate includes, "in addition to the property specified in section 541 . . . – (1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted . . . ." Since Congress did not include a 180-day time period in § 1306(a)(1), we presume that Congress acted intentionally in excluding it. This Court concludes that Ellen’s post-confirmation inheritance is property of the estate under § 1306(a)(1) with which the Chapter 13 Trustee is authorized to modify the confirmed Plan to increase the amount of payments on claims under § 1329(a).

In re Wirshing, June 3, 2015, Nik Geranios for Wirshing, Robert Drummond, Trustee

2015 Mont. B.R. 324

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Womack v. Bar Nothing Ranch Partnership LLC, Chapter 7, Adversary Proceeding, Limited Liability Company, Capacity

Plaintiff contends that Amen did not have actual authority under the Lowe/Amen, LLC Operating Agreement to encumber property without Lowe Property Holdings, LLC’s consent. Plaintiff argues that Amen did not have apparent authority to encumber Lowe/Amen, LLC’s property because: (1) encumbering real property was not for carrying on in the usual way of Lowe/Amen, LLC’s business; and (2) Bar Nothing knew or should have known that Amen lacked authority to encumber Lowe/Amen, LLC’s property. Bar Nothing argues that it lacked actual knowledge of Amen’s limited authority and that mortgaging land is not unusual or extraordinary.

Bar Nothing asserts that no testimony was presented on whether Amen’s actions were apparently for carrying on in the usual way the business or affairs of Lowe/Amen, LLC. Then Bar Nothing acknowledges that Dan Lowe had testified that mortgaging property was not Lowe/Amen, LLC’s ususal course of business. Dan Lowe’s testimony, is consistent with Lowe/Amen, LLC’ purpose, as set forth in its Operating Agreement, which includes purchasing and renting real properties, but not encumbering such properties for personal debt. The Court concludes that Amen’s pledging of Lowe/Amen, LLC’s property to secure his personal debt was not apparently for carrying on in the usual way the business of Lowe/Amen, LLC. The Court rejects Bar Nothing’s argument that Amen’s actions did not financially harm Lowe/Amen, LLC, and the apparent suggestion that absent any financial harm, Amen’s actions could somehow morph into actions taken in the ususal way of business.

The next inquiry is whether Bar Nothing knew that Amen lacked the authority to bind Lowe/Amen, LLC. The contradictory testimony on this point is troubling, but the scales tip in Amen’s favor because Bar Nothing argues in its Post-Trial Brief that "mortgaging land is not unusual or extraordinary, particularly by the tenant and co-member of the owner. As noted, Lowe did the same thing himself." That argument is consistent with what Amen said he learned from Green, but is not accurate. Lowe did not unilaterally mortgage Lowe/Amen, LLC’s property, particularly for personal debts.

Bar Nothing asks the Court to reform the Trust Indenture to reflect the intentions of the parties. Amen and Bar Nothing intended that Bar Nothing have a security interest in Lowe/Amen, LLC’s property. Lowe/Amen, LLC, however, never intended to grant Bar Nothing a security interest in its real property. The intentions of the parties to the Trust Indenture, namely Bar Nothing and Lowe/Amen, LLC, are irreconcilable, and thus, reformation is not a proper remedy in this case.

Womack v. Bar Nothing Ranch Partnership, January 20, 2015, Trent M. Gardner for Womack, James A Patten and Scott W. Green for Bar Nothing Ranch Partnership

2015 Mont. B.R. 23

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Wright, Chapter 13, Lien Avoidance

Case no. 14-61107

Wright described his residence at 316 West Boulevard as a small older stick house built around 1900 on a half lot in the middle of a block in Lewistown, located next door to another small house on a half lot at 314 West Boulevard which he also owns. Together, 314 West Boulevard and 316 West Boulevard comprise one lot according to the city records, Wright testified. Wright testified that he purchased 316 West Boulevard in approximately 2006 or 2007, but did not complete the purchase of 314 West Boulevard until approximately 2 years later in 2008 or 2009. He testified that he intended either to connect the two small houses at 314 and 316 West Boulevard or to tear them down and build a single house on both lots. Wright testified that Satterfield’s judicial liens are against both of his properties at 314 and 316 West Boulevard and that her liens interfere with his enjoyment of his homestead. The evidence is undisputed that no value exists in the claimed homestead above the allowed $250,000 Montana homestead exemption, MCA § 70-32-104.

The general rule governing exemption of homesteads is: "The homestead is exempt from execution or forced sale, except as in this chapter provided." MCA § 70-32-201. The instances in which a homestead is subject to execution or forced sale in satisfaction of judgments are listed at § 70-32-202. They include judgments on: (1) debts secured by construction or vendors’ liens upon the premises; (2) debts secured by mortgages on the premises; and (3) debts secured by mortgages on the premises "which were executed and recorded before the declaration of homestead was filed for record." § 70-32-202(3). Satterfield’s judicial liens are not from judgments obtained on debts secured by construction or vendors’ liens or upon mortgages.

The Ninth Circuit Bankruptcy Appellate Panel outlined a four-part test for avoidance of a lien:

(1) There must be an exemption to which the debtor "would have been entitled" under subsection (b) of § 522;

(2) The property must be listed on the debtor's schedules and claimed as exempt;

(3) The lien at issue must impair the claimed exemption; and

(4) The lien must be either a judicial lien or another type of lien specified by the statute.

Satterfield cites Moore in objecting to Wright’s homestead on the ground that he does not reside at 314 West Boulevard and no apparent relationship or interdependence exists between the parcels. In Moore, the Court sustained the Trustee’s objection to a homestead exemption in a separate 20 acre parcel because no showing of an apparent relationship or interdependency existed between it and the 30 acre homestead parcel and the debtor’s continued enjoyment of his home did not necessarily required the 20 acre parcel. In the instant case, by contrast, the evidence is uncontroverted that the Debtor’s continued enjoyment of his home at 316 West Boulevard depends on his being able to use 314 West Boulevard for storage for his and his family’s belongings, for parking and for his dog kennels, which are built across both adjacent parcels. The result is that Satterfield’s judicial liens are wholly avoidable under § 522(f)(1)(A).

In re Wright, February 13, 2015, Gary S. Deschenes for Wright, Torger S. Oass for Satterfield

2015 Mont. B.R. 58

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